NGDP expectations: Falling like a stone
Date S&P500 WTI oil 5-year TIPS spread
May 3 1202.26 86.19 2.00%
May 4 1173.60 82.74 1.94%
May 5 1165.87 79.97 1.89%
May 6 1128.15 77.11 1.79%
May 7 1110.88 75.11 1.75%
May 10 1159.73 76.80 1.85%
May 11 1159.75 76.37 1.86%
May 12 1171.67 75.65 1.92%
May 13 1157.44 74.40 1.89%
May 14 1135.68 71.61 1.83%
May 17 1136.94 70.08 1.81%
May 18 1120.80 69.41 1.77%
May 19 1115.05 69.87 1.70%
May 20 1071.59 68.01 1.60%
May 21 1072.58 1.56% (as of 10:30am)
The oil and stock prices (plus falling metals prices) are telling us that real growth expectations are probably falling. TIPS spreads are telling us that inflation expectations are probably falling. Anyone want to guess what is happening to NGDP growth expectations? We can’t know for sure, but I’d wager that if we had an NGDP futures market, NGDP futures prices would have fallen significantly since May 3. BTW, it is a disgrace that the government hasn’t created one. It isn’t just me, Robert Shiller has been calling for an NGDP futures market as well. We are flying half-blind, when we could have extremely valuable market data on NGDP expectations at a trivial cost to the Federal Reserve. I wish more macroeconomists would speak out on this issue.
Tags: Oil, TIPS spread
21. May 2010 at 06:59
“We can’t know for sure, but I’d wager that if we had an NGDP futures market, NGDP futures prices would have fallen significantly since May 3. BTW, it is a disgrace that the government hasn’t create one.”
Why hasn´t the private sector create the NGDP futures market? Is there a market failure that prevents its birth or is that the it won´t be able create enough value to justify its existence?
21. May 2010 at 07:28
Yeah Alex, good question. What is to stop someone like Intrade from adding a NGDP futures contract?
21. May 2010 at 10:05
I have noticed that intrade in particular liked to do things in terms of probabilities. For continuous variables, they partition the real line into several segments and then have the contracts refer to the probability that the variable falls in one of those segments. I used to think this was good, but I realized that this makes illiquid markets (since trading on intrade in the US on a large scale is probably legally dangerous) even more illiquid. I think a more traditional futures contract type prediction market would be significantly more liquid than the current Real GDP intrade markets.
21. May 2010 at 10:07
Perhaps Sumner and Shiller could write a letter to Intrade asking them to make one? Heck, I’d chip in a few bucks to a fund to subsidize market making or remunerate intrade.
21. May 2010 at 10:10
If the Fed really wants to move the price level why not buy oil futures instead of bonds?
21. May 2010 at 10:11
Also, if we had an NGDP futures market it would look an awful lot like the stock market (I can’t reproduce the chart here but the trend in the SP 500 almost exactly fits the ISM index except for the occasional bubble/crash). So you are basically asking the Fed to target stock prices?
21. May 2010 at 10:46
“So you are basically asking the Fed to target stock prices?”.
This is what Roger Farmer has suggested:
http://www.voxeu.org/index.php?q=node/2991
21. May 2010 at 11:26
Wow, that’s clear evidence. Obviously, Krugman’s also been singing this tune this week.
21. May 2010 at 12:45
[…] item on crying fire in Noah’s flood, take note of Scott Sumner’s point about the behavior of the 5-year TIPS spread (i.e., medium term market expectations of inflation) amidst growing concerns about […]
21. May 2010 at 15:47
Scott,
I was reflecting on Trichet’s words today (“Our decisions on May 9 have confirmed it: We are not engaging in any form of quantitative easing.”) and Tim Duy’s reflections on Tarullo’s statement (“All of which together suggests that the Fed’s policy stance is seriously out of whack with policymaker’s interpretation of actual and potential economic developments. And I have trouble explaining the disconnect.”)
Both central banks are seemingly congratulating themselves on not doing any meaningful QE. Thus they are strictly following a policy of deciding monetary policy through nominal interest rates. Unfortunately in the past year there has been significant disinflation. Core annual inflation in the eurozone has fallen from 1.7% to 0.7% in the past year. Core annual PCE has fallen from 1.7% to 1.3% in the past year. Other measures of core disinflation in the US are even more striking. The Cleveland Fed’s median annual CPI has fallen from 2.5% to 0.5% in just the past year.
With such misguided policy and such drastic disinflation what we are witnessing is a steady uptick in real interest rates with absolutely no plan of adjusting monetary policy accordingly. They truly believe they have done all they can do. Meanwhile broad monetary aggregates like M2 and MZM are falling and monetary policy is gradually tightening through their passivity.
In my opinion the European debt crisis could be just the beginning of another round of crises eerily reminiscent of the ones that started in May 1931. I hope I am wrong but nothing that Trichet or Tarullo said reassures me. In the immortal words of Yogi Berra it’s deja vu all over again.
22. May 2010 at 07:05
Alex and JPIrving, NGDP forecasts are a public good. They help with monetary policy. No private entity has an incentive to spend the money required to set up the market, merely to help Fed policymakers. But eventually there will be enough private demand for it to happen without the government. But the government should speed up the process. If they replace their economic forecast division with this market, and they might actually save money.
Jsalvatier, My colleague Aaron Jackson did write a letter to Intrade.
mlb, No, the Fed should target the overall price level (or NGDP), not relative prices like oil.
It would not be similar to stocks, as in 1987 stocks crashed but NGDP expectations probably didn’t move very much.
Marcus, I saw that but don’t agree with Farmer. Target NGDP expectations and just use stocks as one of many inputs into the process. TIPS spreads are also valuable.
Mike, Yes, Krugman’s also concerned.
Mark, Those are very good points. I would simply add that although QE is easiest to visualize–level targeting would actually be most effective–as it would directly raise inflation forecasts and lower real rates. We should probably do both, plus negative interest on ERs. “Shock and Awe”
24. May 2010 at 14:16
[…] about a Japanese-style deflation emerging in the United States. Other observers like Tim Duy and Scott Sumner are similarly concerned as they fear U.S. aggregate demand is going to get increasingly weak. I do […]
24. May 2010 at 14:27
[…] about a Japanese-style deflation emerging in the United States. Other observers like Tim Duy and Scott Sumner are similarly concerned as they fear U.S. aggregate demand is going to get increasingly weak. I do […]
24. May 2010 at 21:10
[…] about a Japanese-style deflation emerging in the United States. Other observers like Tim Duy and Scott Sumner are similarly concerned as they fear U.S. aggregate demand is going to get increasingly weak. I do […]
25. May 2010 at 07:06
I am one of your regular readers and I am catching up on your blog today and i noticed you believe 90% of your readers are “Right Wing”. I am in the other 10% – but hey i am a businessman (not an economist). I even believe in the usefulness of “kicking the can down the road” much to the horror of most econoblog writers on the right.
I too am looking for the Bernacke of 1999. I too think those who fear 70s style inflation are fighting the last war. I have felt first hand the impact of bank credit squeeze, dispite our firms’ liquidity, track record and ability to repay. And yes, our main problem is lack of demand, not high taxes, not worries over health care reform, worries over Obama this, Obama that. Get me customers and I will figure out the rest.
25. May 2010 at 08:28
Frank, Thanks for the support. I agree with the left on this issues.