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Monday, September 28, 2015

Sumner on Today's Market Selloff

He didn't specifically mention the market but if you follow his post today that the 'case for tightening is getting weaker and weaker' with the Fed's Dudley's declaration that the Fed is most likely to raise rates-Sumner would say tighten-before the year is up then the selloff is not hard to understand.

Dudley sounds eager for a hike:

"New York Federal Reserve Bank President William Dudley said on Monday the Fed remains on track for a likely rate hike this year and could reach its inflation target next year, faster than many other policymakers anticipate."

"Dudley said the first hike could come as soon as October as policymakers take stock of an improving economy."

The Fed "will probably raise rates later this year," with the Oct. 27-28 session "live" for the rate hike debate, Dudley said at an event sponsored by the Wall Street Journal in New York. The Fed also meets in December.:

http://www.cnbc.com/2015/09/28/feds-dudley-fed-will-likely-raise-rates-later-this-year.html

The new data on August spending and inflation 'firmed' according to a CNBC headline:

"U.S. consumer spending grew briskly in August and a key measure of inflation firmed a bit, signs of strength in America's domestic economy that could lead the Federal Reserve to tighten interest rates despite weakness abroad."

"The Commerce Department said on Monday consumer spending increased 0.4 percent after an upwardly revised 0.4 percent rise in July."

"The figures give a bullish sign for economic growth in the third quarter"

"These data underscore the ongoing health of the consumer sector," said John Hoff, an economist at RBS Securities."

"The report could help convince investors of Fed Chair Janet Yellen's view, most recently expressed on Thursday, that the economy was strong enough to warrant a rate increase this year. New York Fed President William Dudley on Monday also said a hike was likely this year and could come as soon as October."

"Investors have been doubtful, with many betting that the Fed's first rate increase in a decade won't come until March."

http://www.cnbc.com/2015/09/28/us-personal-income-aug-2015.html

Sumner though is not convinced-he points to TIPs spreads which he says weaken the argument for tightening even more:

"The recent plunge in TIPS spreads is reaching frightening proportions:

5 year = 1.09%

10 year = 1.42%

30 year = 1.61%

"Yes, I know they can be distorted by illiquidity, but they are not THAT far off market expectations. And don’t forget they predict CPI inflation, which runs about 0.3% above the Fed’s preferred PCE. In essence, the Fed has a 2.3% inflation target. They aren’t likely to hit it."

"Also recall that since 2007 the Fed’s been consistently overly optimistic about future growth in AD—the markets have been more pessimistic, and more accurate."

"Also recall that Fed policy has a big impact on the global economy."

"Also recall that the global economy seems to be moving into a disinflationary cycle."

"Given that Fed tightening has the potential (and I emphasize the potential, maybe a 1 in 6 chance) of driving the global economy into a recession, and given there is basically no upside from tightening now, the Fed’s got to ask itself one question: “Do I feel lucky today?

http://www.themoneyillusion.com/?p=30733

Here is Lawrence Summers on CNBC-he's also opposed to hike as is Krugman.

http://larrysummers.com/2015/09/10/rate-hike-doesnt-seem-a-prudent-risk-to-take/#more-4708

 I don't get why Dudley seems almost antsy about a hike. He says inflation may be back at 2% next year. 

Why then do it this year?

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