NGDP growth and interest rates28th April 2019
NGDP growth in Q1 came in at 3.8%, a bit less than expected. As a result, bond yields declined. Indeed NGDP growth has been slowing ever since hitting a peak of 7.6% in 2018:Q2.
One word of caution. Due to the government shutdown this data is likely to be revised—statisticians were missing some trade data. The 0.6% GDP inflation rate seems a bit odd, perhaps it will also be revised. Year-over-year data is probably more reliable.
The media focuses on RGDP, which came in higher than expected, but it’s NGDP that drives interest rates in the long run.
Commenters keep telling me that money is too tight, but I see 5.1% NGDP growth over the past 4 quarters. Don’t assume that rising interest rates imply tight money.
The RGDP growth was strong, which is good news for supply-siders. There is a caveat however, some experts say the internals were somewhat weaker, with growth being distorted by transitory factors. Time will tell.
PCE inflation was only 1.7% year-over-year. That’s a problem, and perhaps that signals that money is a bit too tight, but since unemployment is below the Fed’s estimate of the natural rate it’s a fairly small problem.
I expect NGDP growth to continue slowing over time, but given my recent track record no one should take my predictions very seriously. Overall, I think the Fed’s doing a very good job at the moment, but the regime still has serious flaws that may show up if the economy is hit by a shock.
I also see the recent strength as one more nail in the “long and variable lags” theory. In December, forecasters widely anticipated a slowdown in the economy. Then the Fed issued some dovish comments and the asset markets immediately perked up. By March the underlying economic data was also showing increased strength. Monetary policy affects the economy within a month or two. Without the Fed policy adjustment in January, the first quarter would have been weaker.
PS. In other news, Bloomberg reports:
The U.S. and China have agreed on a currency provision in their potential trade agreement, Treasury Secretary Steven Mnuchin said in February. Bloomberg News reported earlier that the U.S. was asking China to keep the value of the yuan stable to neutralize any effort to soften the blow of U.S. tariffs.
China won’t engage in currency depreciation that “harms other countries,” Xi said on Friday, adding the yuan will be kept at a “reasonable, equilibrium level,” and the market will play a bigger role in setting the exchange rate.
I suspect the Chinese know exactly how Trump retaliated against North Korea when they failed to live up to their promise to denuclearize.
The Bloomberg article was accompanied by perhaps the funniest headline of the year:
China’s Xi Signals Approval for Trump’s Trade War Demand
Trump demands reasonable, equilibrium exchange rates that don’t harm other countries!!
PPS. Who would have expected the most devastating takedown of modern conservatism to be penned by the author of Liberal Fascism?
Whether you call it the party line, right-wing political correctness, or simply a desire to cater to the president’s fragile ego, it’s simply not acceptable to publicly criticize Trump on the right. Prominent religious leaders feel compelled to dismiss Trump’s sordid sexual history. Passionate constitutionalists simply shrug or celebrate Trump’s words and deeds, no matter how contrary they may be to constitutional principles. You have to gush about his genius when there’s little discernible wisdom in what he does, and you must marvel at his courage when there’s none to be seen. Credit for Trump’s wins is all his; blame for his losses is all somebody else’s. . . .
Indeed, the demand that everyone see the emperor’s new clothes is so powerful that criticizing — or even being inconvenient to — the president’s preferred messaging is seen not only as a kind of treason but as proof that the critic isn’t really a conservative at all.
And people wonder why I call it a cult.
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