Cheshire Cat’s Smile: ‘What Is The Fed Worried About?’
I used to spend quite a bit of time imbibing at local watering holes - both dive bars and the type of granite-topped edifices to pretentiousness that are anathema to the dive bar crowd.
The conversations I had at less "reputable" establishments differed materially from those I found myself engaged in at the nicer joints, with the former centering around sports and drugs and the latter revolving primarily around niceties that can generally be summed up as follows: "What line of work are you in
Great post H. The wage inflation is perhaps one of the most important metric variables at this point.
“Clearly, the worry is that we’ll abruptly catapult into the upper-left quadrant. That would could mean the Fed gets caught flat-footed by the suddenly not flat curve. Next up: stagflation.”
As you and Kocic write, it’s once again the rate of the move towards that upper left quadrant, and the subsequent Fed response. We are clearly in uncharted territory, given 9 years of extensive QE. I think this “historical baggage” (QE) needs to be considered when attempting to model reflexivity of wage inflation to unemployment and real GDP.
Asset bubbles can divert corporate capital in very strange ways.
Interesting that the previous and current cycles show flatter and flatterer late cycle curves — participation rate related? Also, FRED suggests the yoy change in corporate pretax profits leads (by a quarter) yoy change in nonfarm business unit labor costs. Q4 17 and Q1 18 pretax profits were each down 6% yoy. More to come? Q2 and Q3 17 are rather difficult base periods.
Notice each vertical line is both depressed towards the x-axis and is lower down than the preceding spike. This seems to suggest successive recoveries are resulting in diminishing returns for wage growth. In other words, each recovery is seeing less and less wage growth. That “goldilocks” quadrant may be arbitrary since its pegged to earlier cycles that had higher baseline wage growth. Ergo, this may already be the goldilocks period.
I wish you would have posted this over @ SA. I enjoy the wackiness of (some) comments over there so much.
Nicely assembled essay by the way, and even I can grok it. That’s not frequently the case with much of your stuff but I’m catching on.