Rent Prices Stickiness and the Latest CPI Data.

Fear of increasing inflation in the U.S. appear to be the trigger behind the market volatility of previous weeks. Recent gains in hourly compensation to workers have had analysts measuring the effect of wages on inflation. In turn, analysts began pondering changes in Fed’s monetary policy due to the apparent overheating path of the economy; which is believed to be mostly led by low unemployment rate and tight labor markets. Thus, within the broad measure of inflation, the piece that will help to complete the puzzle comes from housing market data. Although the item “Shelter” in Consumer Price Index was among the biggest increases for the month of January 2018, for technical definitions, its estimation does weight down the effect of housing prices over the CPI. Despite the strong argument on BLS’ imputation of Owner-Occupied Equivalent Rent, I consider relevant to take a closer look at the Shelter component of the CPI from a different perspective. That is, despite the apparent farfetched correlation between housing prices and market rents, it is worth visualizing how such correlation might hypothetically work and affect inflation. The first step in doing so is identifying the likely magnitude of the effect of house prices over the estimates and calculation of rent prices.

Given what we know so far about rent prices stickiness, Shelter cost estimation, and interest rates, the challenge in completing the puzzle consists of understanding the linking element between housing prices (which are considered capital goods instead of consumables) and inflation. Such link can be traced by looking at the relation between home prices and the price-to-rent ratio. In bridging the conceptual differences between capital goods (not measured in CPI) and consumables (measured in CPI) the Bureau of Labor Statistics forged a proxy for the amount a homeowner ought to pay if the house was rented instead: Owner-Occupied Equivalent Rent. This proxy hides the market value of the house by simply equaling nearby rent prices without controlling by house quality. Perhaps, Real Estate professional can shed light onto this matter.

The Setting Rent Prices by Brokers.

It is often said that rental prices do not move in the same direction as housing prices. Indeed, in an interview with Real Estate professional Hamilton Rodrigues from, he claimed that there is not such a relationship. Nonetheless, when asked about how he sets prices for newly rent properties, his answer hints at a link between housing prices and rent prices. Mr. Rodrigues’ estimates for rent prices equal either the average or the median of at least five “comparable” properties within a mile radius. The key word in Mr. Rodrigues statement is comparable. As a broker, he knows that rent prices go up if the value of the house goes up because of house improvements and remodeling. Those home improvements represent a deal-breaker from the observed stickiness of rent prices.

For the same reason, when a house gets an overhaul, one may expect a bump in rent price. That bump must reflect in CPI and inflation. I took Zillow’s data for December of 2017 for the fifty U.S. States, and run a simple linear OLS model. By modeling the Log of Price-to-Rent Ratio Index as a dependent outcome of housing prices -I believe- it will be feasible to infer an evident spillover of increasing house prices over current inflation expectations. The two independent variables are the Logs of House Price Index bottom tier and the Logs of House Prices Index top tier. I assume here that when a house gets an overhaul, it will switch from the bottom tier data set to the top tier data set.

Results and Conclusion.

The result table below shows the beta coefficients are consistent with what one might expect: the top tier index has a more substantial impact in the variation of the Price-to-Rent variable (estimated β₂= .12, and standardized β=.24, versus β=.06 for the Bottom tier). Hence, I would infer that overhauls might signal the link through which houses as a capital goods could affect consumption indexes (CPI and CEI). Once one has figured the effect of house prices on inflation, the picture of rising inflation nowadays will get clearer and more precise. By this means predictions on Fed tightening and accommodating policies will become more evident as well.

Timorous evidence of “Contagious Effect” after Dow Sell-Off.

The stock market seems to be returning to the old normal of higher levels of volatility. I suggested on Tuesday that former Fed Chairman Alan Greenspan’s comments could have brought back volatility by triggering the Dow Sell-off on Monday, February 5th. As I wrote early in the week, I believe that we should observe some panic manifestation of economic anxiety because of Mr. Greenspan’s comments. In this Blog Post, I will show two Person Correlation tests that may allow inferences as to how investors’ fear has grown since Mr. Alan Greenspan stated that the American Economy has both a Stock Market Bubble and a Bond Market Bubble. The Pearson correlation tests show that the correlation has strengthened during the last seven days (First week of February 2018), suggesting there might be symptoms of Contagious effect.

I correlate two variables taken from two different time frames for the fifty states. First, the natural logs of the search term “Inflation”; and, the natural logs of the search term “VIX” (Volatility Index). Second, I correlate the natural logs of the same searches for both the last seven days period and the previous twelve months period. By looking at the corresponding coefficients, one may infer that the correlation increased its strengthen after Mr. Greenspan Statements -which reflects on the last seven days data. The primary goal of this analysis is to gather enough information so that analysts can conclude whether there is a Contagious Effect that could make things go worst. Understanding the dynamics of economic crisis starts by identifying the triggers of them.

What is Contagious Effect?

I should say that the best way to explain the Contagious Effect is by citing Paul Krugman’s quote of Robert Shiller (see also Narrative Economics), “when stocks crashed in 1987, the economist Robert Shiller carried out a real-time survey of investor motivations; it turned out that the crash was essentially a pure self-fulfilling panic. People weren’t selling because some news item caused them to revise their views about stock values; they sold because they saw that other people were selling”.

Thus, the correlation that would help infer a link between both expectations is inflation and the index of investors’ fear VIX. As I mentioned above, I took data from Google Trends that show interest in both terms and topics. Then I took the logs of the data to normalize all metrics. The Pearson correlation tests show that the correlation has strengthened during the last seven days, suggesting there might be symptoms of Contagious effect. The over the year Person correlation coefficient is approximate to .49, which is indicative of a medium positive correlation. The over the week Person correlation test showed a stronger correlation coefficient of .74 which is indicative of a stronger correlation. Both p-values support evidence to reject the null hypothesis.

The following is the results table:

February 1st – February 8th correlation (50 U.S. States):

February 2017 – February 2017 (50 U.S. States):

It is worth noting the sequence of the events that led to these series of blog posts. On January 31st, 2018 Alan Greenspan told Bloomberg News: “There are two bubbles: We have a stock market bubble, and we have a bond market bubble.” And, on February 5th, 2018, Dow Jones index falls 1,175 points after the trading day on Monday. As of the afternoon of Friday 9th, the Dow still struggle to recover, and it is considered to be in correction territory.

Unemployment √. Inflation √. So… what is the Fed worrying about?

Although the Federal Open Market Committee (hereafter FOMC) March’s meeting on monetary policy focused on what apparently was a disagreement over the timing for modifying the Federal Bonds interest rates, the minutes indicate that the disagreement is not only on timing issues but also on exchange rate challenges. Not only does the Fed struggle with when the best moment is to raise the rate, but also it grapples with the extent to which its policy decisions can reach. The FOMC current economic outlook and their consensus on the state of the U.S. economy have no room for doubts on domestic issues as it does for uncertainties on foreign markets. Thus, the minutes of the meeting held in Washington on March 15th – 16th 2016 unveils an understated intent for influencing global markets by stabilizing the U.S. currency. On one hand, both objectives of monetary policy seem accomplished regarding labor markets and inflation. On the other, the global deceleration is the only factor that concerns the Fed since it could have adverse spillovers on America. The most recent monetary policy meeting reveals a subtle attempt to stabilize the U.S dollar exchange rate at some level, thereby favoring American exports.

Unemployment rate √. Inflation rate √.

The institutional objective of the Federal Reserve Bank seems uncompromised these days. Economic activity is picking up overall, the labor market is at desired levels, and inflation seems somewhat under control. The confidence economists have right now starts by the U.S. Household Sector. Household spending looks healthy, and officials at the Bank are confident such spending will keep on buoying labor markets. As stated in the minutes, “strong expansion of household demand could result in rapid employment growth and overly tight resource utilization, particularly if productivity gains remained sluggish” (Page 6). Indeed, the labor market is showing strong gains in employment level which has made the unemployment rate to decrease down to 5.0 percent by the end of the first quarter of 2016.

Furthermore, FOMC understands the high levels of consumer confidence as a warranty for a sustained path for growth. The committee also pointed out that low gasoline prices are stimulating not only higher level of consumption but also motor vehicles sales. They know of the excellent situation of the relative high household wealth to income ratio. Otherwise, members of the Committee recognize that regions affected by oil prices are starting to struggle while business fixed investment shows signs of weakening. Nevertheless, the consensus among members of the Committee reflects an overall optimism in the resilience of the economy rather than a worrisome situation about the outlook.

By Catherine De Las Salas

By Catherine De Las Salas

The fear comes from overseas.

The transcripts, which were released on April 6th, 2016, show that  Fed officials the concerns stem from global economic and financial developments. The FOMC “saw foreign economic growth as likely to run at a somewhat slower pace than previously expected, a development that probably would further restrain growth in U.S. exports and tend to damp overall aggregate demand” (Pag. 8). They also flagged warnings on wider credit spreads on riskier corporate bonds. In sum, policymakers at the FOMC interpret the current lackluster global situation as a threat to the economic growth of the United States.

To discard choices.

Therefore, the fact that those two conditions overlap has made the Committee anxious to intervene in an arena that perhaps could be out of its reach. By keeping unmoved the interest rate of the federal bonds during March -and perhaps doing so until June-, the FOMC does not aim at stimulating investment domestically. Nor does it at controlling inflation. In fact, the policy choice reveals a subtle attempt for keeping the U.S dollar exchange rate stable overseas, thereby favoring American exports. The latter statement could be inferred from the minutes based on the Committee’s consensus on the state of the economy. First, U.S. labor markets are strong, and the Fed considers that the actual unemployment rate corresponds to the longer-run estimated rate. Second, inflation –either headline or core- are projected and expected to be on target. And third, domestic conditions are in general satisfactory. The only factor that remains risky is the rest of the world. Therefore, whatever action they took last March meeting could be interpreted as intended for influencing global markets.


A set of possible negative US economic shocks.

The puzzling aspect of recent data on inflation has been the deflation trajectory forged by oil prices. The index on energy by itself has fallen 28.7 percent over the year. Just in January 2016, the energy index declined 2.8 percent as gasoline index did so by 4.8 percent during the same month. The energy index has been dragging down the computational results of inflation severely to the extent that it makes the entire index hard to interpret. The truth of the matter is that oil prices’ downward trend has started, at least, to cast doubts on whether the offset in the overall inflation measure represents a relocation of resources within industries, or the index is masking a worrisome situation of an entire economic sector. In other words, with the decline in energy prices, could energy-related companies lead the US economy toward a slowdown?

By Catherine De Las Salas

By Catherine De Las Salas

Could energy-related companies lead the US economy toward a slowdown?

Current conditions and economic outlook in the United States have economists looking for signs of economic overheating by looking into the theoretical relation between unemployment and inflation. However, following the economic theory may work as a perilous distraction under the present situation. In theory, when the unemployment rate becomes very small, employers increase their salaries which in turn augments consumer spending. Such an increase in consumer spending leads to higher level of prices as the demand for goods surges. Then, given that news of unemployment have been certainly positive for the last six months, economists are cautiously focusing on inflation to determine whether or not the economy is overheating. This logic of analysis might generate bias as it derives conclusions from an arithmetic average on the consumer price index.

We are left with Monetary shocks, oil shocks, or a deterioration of global economic conditions:

More precisely, the fact that energy index offsets currently core inflation keeps economists in their theory comfort zone by ignoring oil sector volatility. On one hand, they see households in a proper position as their liabilities have declined by 12 percent during the so-called “Great Deleveraging” period. Specifically, economists at the Federal Reserve Bank of New York claim that this very fact makes the household sector more resilient to absorb shocks, which seems reasonable. Also, they stress that the financial sector appears strong as the sector counts with larger liquidity buffer now than in preceding years. Further, Fed’s officials see good news in regards to the labor market and unemployment rate, which has dropped to a national average of 4.9 percent –also positive. On the fiscal front, it seems clear to most of the people that events such as the sequester of 2013 are unlikely to happen in the foreseeable future. Technology shock-wise, no negative shocks appear to linger in the horizon. Therefore, by discarding the set of possibilities on surprising negative economic shocks, the only ones lingering are either monetary shocks, oil shocks, or a deterioration of global economic conditions.

Now, if America trusts their monetary authorities, then the only standing threats are oil shocks and an international economic slowdown. Red flags have been waved during the last six months stressing the levels of debt of petroleum companies. Some estimates coming from point to numbers of around U$200 billion debt that may be approaching default soon. It is worth remembering that in the midst of the Great Recession in 2008 losses on mortgages were around U$300 billion. Although acknowledging the difference between housing sector’s debt and oil companies’ debt is a must for any analysis, the risk is somewhat similar at least regarding magnitude.

“Core” inflation might be reflecting pressures solely generated by retailers.

Data on both unemployment and prices have monetary policy analysts wondering whether or not the US supply side of the economy is heading towards overheating. Thus far, indicators on industrial production and capacity utilization show there is still room for the economy to advance at a good pace without risking too many resources. Such indicators are produced and tracked by the monetary authority of the nation, so they have particular relevance for every analysis. However, there still are data on both unemployment and prices to help out with the diagnosis of the actual economic situation. On one hand, 92% of the metropolitan areas in the nation experienced lower unemployment rates in July 2015 than a year earlier, while only 20 metro areas showed higher rates. On the other, measure of the “core” inflation, which isolates energy and foods price volatility, reaches 1.8 percent change from the first quarter of 2015.

So, if higher production leads to lower unemployment, and the latter in turn leads to higher prices, then the easiest way to identify whether or not an economy is overheating is by analyzing to what extent prices changes are pushed up by falling rates of unemployment. This far of 2015, both conditions are met apparently. Unemployment rates are indeed falling; therefore, it could mean production is moving up. Then, what is a stake currently is to clarify whether or not US production is exceeding its capacity. Again, by looking at capacity indexes, it seems not to be the case right now. But, it is better to make sure it is not happening and thereby ruling out any alternative possibility.

Many econometric methods will help analysts to achieve valuable conclusions.

Perhaps digging into the price setting relation through regressing real wages on profits may yield some clues about the current situation. However, econometric models would severely hide the actual magnitude of oil and energy price volatility. Therefore, a rather quicker alternative lives in qualitative data. In other words, if analysts would like to know whether or not companies would transfer increasing labor costs onto the customers via price increase, what would the answers be? looked at one of the state-level surveys in which such a question was included. The Texas Manufacturing Survey, which is conducted by the Dallas Fed, inquired among 114 Texas manufactures the following question. “If the labor costs are increasing, are you passing the costs on to customers in the way of price increases?” The survey answers were collected on August 18th through the 26th.

Here is what the study showed.

By sectors, surveyed retailers appear be the only ones prompted to transfer increasing labor costs to customers via price increase. Although very tight, 43.9 percent of the answers indicated that retailers would rise price as an outcome of increasing labor costs, whereas 41.5 would not. The Texas service sector respondents indicated that they would not do so by 54.5. Likewise, manufacturers rejected the possibility by 52.4 percent and considered positively by 35.7 percent. Below are the charts of which all used Texas Manufacturing Survey Data.

Texas Manufacturing Survey. Dallas Fed Aug. 2015.

Texas Manufacturing Survey. Dallas Fed Aug. 2015.

Although it is not feasible to extrapolate survey’s results onto the entire US economy, Texas’ has a particular significance for any current economic analysis. Indeed, Texas’ economy comprises a large share of oil related business, which is precisely the industry that brought this puzzle in the first place. Thus, it seems somewhat clear to conclude that following the Dallas survey, the economy might not be overheating currently.

Texas Manufacturing Survey. Dallas Fed Aug. 2015.

Texas Manufacturing Survey. Dallas Fed Aug. 2015.

So, what does these data tell economists about the US economy?

Although some would answer it says little because of its sample size and geographic limits, and its business size aggregation, there are some hints within the survey. First, it could be said that companies are currently absorbing the cost of growing, which might indicate that they are indeed venturing and the economy is expanding. So far so good. The concerns, though, stem from the speed of such expansion, which is hard to identify by using these data. But again, it is important to check Federal Reserve Data on industrial production and capacity utilization, which would yield some confidence against overheating. Second, although business size matters for determining whether or not increasing labor costs can be transferred to the customer via prices, the fact that retailers stand out in the survey must mean something for analysts. According to these data, retail appears to be the most sensitive sector right now; therefore, the 1.8 “core” inflation might be reflecting inflationary pressures solely generated by retailers.

Texas Manufacturing Survey. Dallas Fed Aug. 2015.

Texas Manufacturing Survey. Dallas Fed Aug. 2015.

Texas Manufacturing Survey. Dallas Fed Aug. 2015.

Texas Manufacturing Survey. Dallas Fed Aug. 2015.


The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Data were collected Aug. 18–26, and 114 Texas manufacturers responded to the survey. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month.



“Core” inflation rate will have huge influence on monetary policy next month.

Second Estimates for real GDP growth in the United States indicate that the economy grew at 3.7 percent during the second quarter of 2015 after correcting by price change. The report from the Bureau of Economic Analysis informs that the change mainly derived from positive contribution of consumer spending, exports, and spending of state and local governments. These increases are said to have been offset by a deceleration in private inventory investment, federal government investment, and residential fixed investment. The revised figure for first quarter of 2015 went up from -0.7 percent to 0.6 percent.

Besides real GDP calculations stand the estimates for prices changes in goods and purchases made by American residents that the Bureau of Economic Analysis (BEA) does simultaneously to the calculations made by the Bureau of Labor Statistics (BLS). In this regard, this time around the second quarter, prices had a positive growth of roughly 1.6 percent, which the BEA reports was derived from an increase in both consumer prices, and prices paid by local and state governments. Please bear in mind that, in the first quarter of 2015, prices were said to have dragged down the GDP numbers since the index decreased by roughly 1.1 percent change.

H&M Store in Broadway NYC. By Catherine De Las Salas. Summer 2015.

H&M Store in Broadway NYC. By Catherine De Las Salas. Summer 2015.

These price changes are actually good news for the Federal Reserve System for whom a moderate upswing in inflation helps them to achieve their yearly monetary goal of 2.0 percent inflation rate. And for those of whom like to make economic forecast, these figures mount onto their analysis for determining whether or not the Federal Reserve will increase interest rates in September. So, although real GDP measures are certainly corrected for price changes, the BEA’s price index will -on its own- have huge influence on monetary policy options for the months to come.

Thus, relevant data nowadays stem from BEA’s “core” inflation rate, which is to say price change without food prices and energy prices. Indeed, when figures isolate energy and foods volatility, the measure of inflation reaches 1.8 percent change from the first quarter of 2015. These changes in prices and output rightly affect the wallet of American residents. Price changes, plus increases in output -which reflect decreases in unemployment rate- may take consumer and producers to edge up their spending, which was one of the factor behind positive change in real GDP growth as mentioned above. Then, whenever spending tends to accelerate beyond its capacity the Federal Reserve reacts with an increase in interests rates. Even though one could argue that such is not currently the case, given that data on capacity utilization clearly shows that the American Economy has room to further spending, the BEA’s “core” inflation will be the measure that could possible make Federal Reserve Officials think twice about interest rates.

So, the puzzle about what the Federal Reserve will end up doing next Federal Open Market Committee meeting is fourfold, and it will derive from the different sources of data: first, price change data from BEA, which BEA claims to be way more “accurate” than BLS’. GDP growth from BEA, which is calculated by correcting price changes with their own price index. Price change from BLS, which may vary from BEA’s calculations. And capacity utilization from the Federal Reserve, which is whom finally decides on interest rates changes.

It’s time to look at price changes without accounting for oil price effect.

After a year of declining crude oil prices which forged price spillovers all over the US economy, it is time for economists to look at price changes without accounting for the petrol effect. So far, 2015 has been a year in which dropping gas prices have affected almost every index from the US Bureau of Labor Statistics. Indeed, the Consumer Price Index started to decline since summer 2014 when the price of crude oil marked roughly U$107 per barrel. Since then, the Consumer Price Index declined continuously until January 2015. Likewise, the Producer Price Index, which behaves similarly, followed the decline until the beginning of the current year. However, both indexes started to increase from negative territory to positive areas up to 0.4 percent in July 2015, which is particularly the case of Producer Price Index.

So, if economists believed that oil prices accounted vastly for the overall decrease on Inflation, then, what is going on now with the hike in Indexes since oil prices are still low? The clear answer is that inflation has begun to bounce back.

Consumer Price Index and Producer Price Index

Consumer Price Index and Producer Price Index

Price statistics have begun to move wider than they did before the summer of 2014:

Generally speaking, data in Price Indexes show that price statistics have begun to move wider than they did before the summer of 2014. This trend marks a year of some sort of stagnation in Indexes that can be traced back to the spring of 2013. This period between summer 2013 and the summer 2014 looks almost flat for both indexes. Right after such a flat period, oil prices started to drop and so did both indexes. However, oil prices are still at record lows whereas the indexes started to rebound.

Therefore, it is time to scrutinize indexes in order to establish to what extent oil prices are still dragging down arithmetically consumer prices, and at the same time looking at the origin of current monetary pressures. By isolating prices from oil effect, several conclusions on prices can be drawn. First, inflation rate without accounting for energy prices, is higher than what got reported officially. Second, prices for “guest rooms”, which is to say tourism, may indicate people are spending conspicuously. And third, almost everything else -independent from oil- is increasing.

Final Demand Index less Foods and Energy.

Final Demand Index less Foods and Energy.

For instance, “in July, a 3.1 percent advance in margins for building materials, paint, and hardware wholesaling was a major factor in the increase in prices for services for intermediate demand. Furthermore, “the indexes for processed goods and feeds and for processed materials less food and energy moved up 0.9 percent and 0.1 percent respectively”, reported the US Bureau of Labor Statistics last August 14th 2015.

More in detail and in regards to final demand services, “over 40 percent of July increase in the index for final demand services is attributable to prices for “guest room rental”, which jumped 9.9 percent”. Clearly, prices are moving up whenever oil effect gets removed from calculations.

Expect an increase in interest rates:

US monetary authorities should be aware of these recent trends for sure. Therefore, it is reasonable to expect an increase in interest rates in order to curb down excessive consumer spending, particularly whatever spending gets associated with “guest room rentals”. Nonetheless, although this conclusion is drawn exclusively from the point of view of price stability, such a thing happens to be the main mandate of central banks.

What could you infer from 06/17/15 Federal Open Market Committee decision?

What can we infer from today’s Federal Open Market Committee decision?

Today’s Federal Open Market Committee (FOMC) decision corresponds to Fed’s previous statements about the current state of U.S. economy. First, data inputs on Capacity Utilization led timidly FOMC to insights on industry output gap. Second, the Beige Book clearly illuminated onto issues related to the economic geography of current economic conditions. Third, preliminary data on GDP 2015Q1 continued to be obviously a major concern. Finally, neither was employment at stake this time, nor inflation, nor household consumption. First, In spite of the Beige Book reveling regionally based concerns, they believe nothing can be fixed institutionally. The FOMC left unchanged interest rates for federal funds, which is the rate they use to influence market loan rates. Its statement of June 17th 2015 reads “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate”.

On one hand, Oil Prices favor certain policy pressures mostly coming from Texas; therefore, policy preference coming from related industries such as transportation and utilities. On the other hand, other type of monetary policy preferences are coming from the most recent levels of exchange rates of U.S. dollar vis-à-vis Euro dollar. Here though, the FOMC has a muscle through influencing the rate. However, doubts are cast given the uneven reality of foreign exchange rates. Thus, not modifying the interest rate –in absents of the lowering option- seems the only way for the FOMC to bolster U.S. exports thereby doing so to employment. These two economic aspects made up the current concerns of Fed’s officials. Nonetheless, neither of them could be effectively influenced under the dual mandate of the FOMC. They demonstrated today liquidity trap keeps restraining monetary policy options.

What seems to be clear after today’s FOMC statement is that although the U.S. Federal Reserve aims at closing the output gap by influencing the interest rate, the institution has no clear diagnostic on Capacity Utilization. Apparently, Fed’s officials know data on Capacity Utilization no longer unveil facts worth concluding on output gap. What FOMC probably learned on Capacity Utilization during the second week of June is that Industrial Capacity on Manufacturing is below its long term average only 1.6 percent. The Federal Reserve Index for Manufacturing Industrial Capacity is at 77 percent. Non-durable goods Industrial Utilization Capacity is just 1.5 percent below its long term average. The latter Index showed 79.1 percent. Mining Industry Capacity Index shows the sector is adjusting to oil price rapidly and registered 83.3 percent Utilization.

Finally, trying to predict what the FOMC would do regarding the interest rate seems to be more complicated task than just plugging in policy targets on the Taylor Rule equation. Actually, the Taylor Rule is nothing but a crystal bowl inasmuch as economists look at it in isolation of surrounding data and information. Indeed, they seem to seriously consider broader sources of data and make a judgement comprehensively.

Is the Current U.S. Dollar Strong All Over the World?

The “Strong Dollar” factor:

“Strong Dollar” is said to be one of the main causes explaining the poor economic performance of the United States during the first quarter of 2015. United States’ exports were affected by the appreciation of the currency vis-à-vis some of the foreign currencies. Likewise, exports towards the United States benefited from the U.S. Dollar appreciation. In aggregated terms, currencies of major U.S. trade partners, versus the U.S. dollar, have gone up in average by roughly 3.2% in the last five months of 2015. This trend can be seen in the picture below on blue line (1 Broad). Furthermore, a subset of other major currencies that circulate worldwide have appreciated since January by an average of 5.7% against the U.S. dollar, which can be observed in the orange line in the graph below (2 Major Currencies). The euro, instead, has depreciated 8.3% since the beginning of the year (Yellow line in the graph below). There is where the competitive advantage resides for Europe nowadays.


Who’s to blame?

When it comes to blame foreign trade for poor economic performance in US, Asian countries come to mind of Americans. For economic growth on 2015Q1, such a statement seems to be somewhat ambiguous. The graph below shows how major Asian currencies have performed recently. The Yuan, dotted white line in the graph, has been mostly steady for what has bygone of 2015. Otherwise, the currency that has depreciated the most, amongst Asians monetary markets, is the Taiwanese Dollar. The Indian Rupee initiated the year with a downward trending which lasted until the second week of April; then, the Rupee started to gain value against the U.S. Dollar. South Korean currency, the Won, had its lowest value against U.S. Dollar this year by the last week of April. The Won did so after having been depreciating since the first week of March. Dollar from Singapore has also been depreciating since early March after a spike in its value against dollar (Yellow line in the graph).

Currency 2
In order to elaborate these currency series, we took the value of the currency against the U.S. Dollar at its value during the first week of 2015, and use such value as index. The data source is the Board of Governors of the Federal Reserve System, which aggregates the currency data for major U.S. trading partners. The Federal Reserve defines these aggregated data as follows:
1) Broad: “A weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners”.
2) Major Currency: “A weighted average of the foreign exchange value of the U.S. dollar against a subset of the broad index currencies that circulate widely outside the country of issue”.
3) OITP: “A weighted average of the foreign exchange value of the U.S. dollar against a subset of the broad index currencies that do not circulate widely outside the country of issue.

Fed may get monetary policy mussel back in 2015.

2014 showed no excitement in monetary trends, generally speaking. Besides the Federal Reserve’s Quantitative Easing program (QE), the pockets where the American money is remained mostly stable. The interesting changes were in the first pocket which comprises currency that circulates on the streets (Households). This pocket grew in one year 9.6% (from November 2013 to November 2014), which is a remarkable figure as long as changes in such pocket -arguably- reflect either Inflation or increase in nominal income. Considering that inflation rate in the United Sates has been oscillating roughly around 1.5% for the last two years, this 9.6% may mean that changes in the currency pocket were due largely to an increase in nominal income. Basically, this pocket consists of money that circulates outside the U.S. Treasury, the Federal Reserve’s Banks, and the Vaults of Depository Institutions.

Monetary trends
Changes in the circulating currency may give the Federal Reserve the chance to have the monetary policy mussel back. With data showing low inflation levels for the last two years in the United States, it is almost virtually impossible for the Fed to influence changes in interest rates. Thus, by having 9.6% year change in currency due possibly to an increase in nominal income, chances may increase for a larger number on expected inflation for 2015. Larger expected inflation number may encourage lending during 2015 thereby stimulating consumption and investments, which at the end of the day translate into economic growth.
Another pocket currently experiencing decent growth is the one that contains Demands Posits at domestic commercial banks and US branches of foreign banks. From November 2013 to November 2014 the pocket increased its amount by 147 billion dollars. Such amount represents almost 15% change in just one year. Roughly speaking, US branches of foreign banks hold on average 14% of the total money contained in the Demand Deposits pocket.
Finally, there is the richest pocket –the Vaults of commercial Banks- in the United States: all other money that is out of street circulation, which includes thrift institutions, savings deposits, retail money funds and small denomination time deposits. On the Graph this pocket is tagged as “Total non-M1 M2”. This pocket enlarged its amount by 394.70 billion from November 2013 to November 2014, which represents a percentage change of 4.7% for the same period.
Note: All used data in this article were seasonally adjusted.
Data source: Federal Reserve Statistical Release. December 18th 2014.