Age Is Not Just A Number

The Week Ahead

May 6, 2019

It’s May 2019, and the US expansion is now officially the longest on record. In the past we claimed that the current expansion is younger than it looks, if measured beginning from the point that GDP reached its pre- recession level. But today, even by that yardstick, this expansion isn’t exactly a spring chicken (Chart).

So, should investors enter late cycle mode? This cycle is old in US terms, but relative to the experience in other countries, the current US expansion is still in its prime (see “Hang in There Baby: Lessons in Recession Avoidance “- a great piece, if you haven’t read it).

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Don’t Sweat the Decimal Places

The Week Ahead

April 15, 2019

The US Federal Reserve is rethinking its approach to monetary policy, but it seems to be sweating over decimal places, rather than doing anything truly different. The decimal places are in its preferred measure of inflation, the core PCE price index, which at last reading sits at 1.8%, against a target of 2.0%. Given the vagaries of how inflation is measured, and methodology changes that can distort year-on-year comparisons of price levels (most recently for clothing), a 1.8% inflation rate is, for all intents and purposes, 2%. Indeed, at the Bank of Canada, a few decimal places here or there on CPI have long been something that the central bank will ignore.

The long end of the bond market might react a bit negatively to the outcome of the coming Fed discussions. But the changes Vice Chair Clarida seems to be considering in moving to a version of average inflation targeting are also only about a handful of decimal places. And really, they are mostly a matter of semantics in how the FOMC might describe what it has been doing all along. Given its current dual mandate of full employment and price stability, it would have no reason to squash the labour market aggressively to squeeze inflation down from, say, 2.3% back to 2.0%. This isn’t the ECB.

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