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12/01/2013

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In your video at the end: I'm given cause to wonder, to what extent does A fed (announced) inflation-target increase cause an actual increase in inflation? Should those lines be yoked?

Steve,
It is Monday morning, and I am must now reading the posts from Nick, Andolfatto, Noah Smith on this issue.
To answer your question in brief, if the Fed announced an increase in the inflation target, it would be disinflationary. because the natural real interest rate would be decreased due to the Fed rate being stuck at the ZLB.
At this point, it would be better for the Fed to announce a 1% inflation target. This would increase the natural real rate over the current real rate and increase the expansionary effect.
I was sitting in bed in the morning running through scenarios that the ZLB is creating low inflation. And now I see others writing about it.

Put the natural real rate at +1%. Then hold the Fed rate at the ZLB as far as the eye can see with no intention of changing it. The implication is an inflation target of -1%, as real GDP hits its natural level. A stable state will try to crystallize with the Fed rate below the natural real rate. That stability will imply a negative inflation target. This may cause an effect to lower inflation.

This is a new idea that came to me in the morning. I was expecting inflation to perk back up, but now there may be an explanation for inflation going in the other direction.

As far as I can see, the Fed rate has never been held at the ZLB as real GDP reaches its natural level. The Fed rate always rose before. There is something unusual happening.

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Data as of 3rdQ-2018
Effective Demand = $18.433 trillion
Real GDP = $18.671 trillion
Productive Capacity = $24.872 trillion
UT index is at effective demand limit = -0.92%
Effective demand limit = 74.1%
TFUR = 75.1%
ED Fed rate rule = 4.0%
Estimated Natural Real Interest rate = 2.3%
Short-term real interest rate = 2.8%

There is no recession for 3rdQ-2018. Chance of recession is growing as economy has now reached 2nd effective demand limit in this business cycle. I am forecasting that economic conditions will begin to contract in the second half of 2018.




Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):

The UT Index

z-vertical:

z-vertical

z derivatives in terms of labor & capital:

z derivatives in terms of labor & capital

Effective Demand, real GDP & Potential GDP:

ED, real GDP & pot rGDP

ED Output Gap:

ED Output gap

Corporate profit rate over real cost of money:

Corp profit rate over real cost of money

Exponential decay of Inflation:

Corporate profits impact Inflation

Measures of Inflation:

Measures of Inflation

YoY Employment change:

YoY employment change

Speed of consuming slack: yoy monthly:

Speed of consuming slack

Speed of consuming slack: quarterly:

Speed of consuming slack quarterly

Real consumption per Employee:

real consumption per employee 2

Will real wages ever rise faster than productivity?:

Productivity & Real Wages

Productivity:

Productivity

Productivity against Effective Demand limit:

Prod & ED limit

Bottom of Initial Claims?:

Initial claims

Tracking inflation expectations:

Fisher effect?

M2 velocity still falling:

Measures of Inflation

All in one:

All in one

Double checking labor share with unit labor costs & inflation:

ULC LS CPI
My Photo
Edward Lambert: Independent Researcher on Effective Demand. Graduate of Atlantic International University where independent research was developed.
Some links for economic analysis
Fed Views - San Francisco Fed, around 10th of each month.
Well's Fargo monthly - around 10th of each month
Well's Fargo weekly
Well's Fargo Interest rate report
Well's Fargo Economic indicators
T. Rowe Price weekly market wrap-up
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