Category Archives: U.S. growth

21/11/15: Be Kind to Economic Forecasting Dodos…


Oh, spare a kind thought for the economists... crippled by the intellectual feebleness of algebraic (and utterly useless) models and hamstrung by the need to sell 'good news' to naive retail clients pounded by the sell-side 'research', they have it tough in this life. And the things are going to get tougher.

So far, in anticipation of the U.S. Fed hikes, virtually all economics analysts working for sell-side stuff brokers have been declaring their firm conviction that once the Fed raises rates, things are going to be off to a neatly clean start - the U.S. economy will shake off any risks to growth, while the Euro area economy will get a devaluation boost from stronger dollar.

Which, by the way, may or may not happen, but as Reuters article (link here) clearly shows, it wouldn't be the economists crowd that will have any idea what is going to happen.

Here are two charts from Reuters:



Now, give this a thought: 2014 and 2015 were relatively 'trend' years for the U.S. economy. And yet, in both cases, analysts surveyed by Reuters vastly, massively, grossly missed the boat on their forecasts. The dodos did predict back in January 2015 that 1Q 2015 growth will be 2.8%, missing the mark by 3 percentage points. And they did chirp out a forecast of 2.5% growth for 1Q 2014 back in January 2014, missing the reality by a massive 5.4 percentage points.

And to give you some more flavour, here is a summary of IMF forecasts for advanced economies (not just the U.S.):

Which confirms the aforementioned truth: economic forecasts ain't got a clue where the major advanced economies are heading, with or without Fed rate hikes.

It would be laughable, if this was not serious: the same types of economists inhabit the forecasting halls of the Fed, providing 'technical (mis-)guidance' to the FOMC on which the decision to hike rates will be made. In other words, the blind are driving, the deaf are navigating them and we are all the passengers on their happy runaway train.

So buckle up. When Fed hikes rates, things might go smooth or they might go rough - we just don't know. But we do know as much: all these economic forecasters have not a clue what will happen...

10/10/15: IMF: Un-Clued on U.S. Monetary Policy Normalisation


For all the positivity chatter about the return of the U.S. growth and 'normalisation' of the interest rates environment pushed into the world of unsuspecting journos by the IMF in its latest WEO Regional Outlook: Western Hemisphere, there is a nagging suspicion that something is strangely amiss.

Take the pesky problem of the U.S. monetary policy being exceptionally loose (or accommodative) since 2008. Chart below shows this by plotting a rate gap between policy rate and the 'neutral rate' with negative values indicating accommodation. Note, neutral rate is defined as the rate consistent with the economy achieving full employment and price stability over the medium term. Note also that adding in QE (over and above simple policy rate) pushes the metric of accommodation well beyond all historical comparatives in size (depth) and duration (length of time accommodation is present):


Now, naturally, one would expect these 'accommodative policies' to create a vast sea of surplus (relative to 'natural rate' consistent) liquidity (aka: money) in the U.S. system. And, naturally, one would expect that any 'normalisation' in the monetary policy would entail removing this surplus over time. Which, again, naturally, should translate into higher rates.

IMF obliges, providing us with this handy chart tracing forward expectations for U.S. policy rate:


The lift-off suggested in the chart above is rather steep and is steeper than the lift-off suggested by market pricing of futures (red line). In a sum, the chart above says: We have no idea what 'normalisation' will look like, but let's hope it will be more benign than the Fed signals and Primary Dealers Survey have been.

But here is a pesky little thing: You won't spot the same dynamics in IMF WEO forecast for either inflation or Libor rates. And the reason is pretty obvious: the more aggressive the Fed path in the chart above, the lower are growth projections in the chart below:


IMF forecasts from 2016 out to 2020 fall squarely in line with 2010-2015 averages for GDP growth (aka inflationary pressures) but are in excess of the 2010-2015 average for inflation itself.

In simple terms, despite all the talk about 'normalisation' of rates, the IMF is really saying that through 2020, we can expect the monetary environment (and with it the interest rates outlook) to be more benign than over pre-crisis average. Worse, inflation is expected to accelerate even though growth is expected to slip.

How does any of this square well with the idea of the Fed rate going to 3.75% as projected in the second chart above? Does any of this square well with projected 2016 interest rates for the Fed going to 1.2-1.3% against Libor under 1.2%? Does any of this square well with forecast inflation jump from 0.906% in 2015 to 1.404% and inflation outlook heading toward 2.322% by 2020?

In short, IMF expectations on both Libor and the Fed rate can be very tight.  Especially over the 2016-2018 horizon. If the Fed does stick to its signalled path (chart 2 above), growth will suffer relative to IMF projections (last chart above), despite already heading toward 2010-2015 average by 2019.

In the mean time, none of the IMF forecasts are consistent with Fed policies addressing in any reasonable way the built up of monetary policy excesses of the past.

Welcome to the world of forecasting after ZIRP. Shall we call it Fudge?..