Wednesday, November 4, 2015

Are we no longer safe from a recession?

I had a speculative indicator of recessions based on interest rates being high or low relative to the IT model trend based on the NGDP-M0 path all described at this post. I mentioned that I would check it out when I got a chance given that there seemed to be potential for really low inflation over the next 6 months as I talked about here.

Well, it turns out for the first time since 2008, the effective Fed funds rate (the short interest rate) is above the IT model trend:

And here's the model (not the trend extracted from the NGDP-M0 path, shown at the bottom of this post) of the 3-month rate (as it usually appears on this blog):

Here's the NGDP-M0 trend -- but it doesn't seem to be above trend (so it may only be a small avalanche)


  1. From your graphs it looks like it has to be way above trend line for a sufficient time (years) before recessions hit. Does not seem to be a concern presently, as it just poked above. However, it could mean the economy is finally picking up, and a mini-overcoordination avalanche is starting, which may result in enough resource misallocation to result in a recession several years from now (trying to channel my inner IE economist).

    1. You're right that it can be above the trend for years before a recession hits -- sort of like how there can be too much snow on a mountainside for months before the actual avalanche -- it just needs a shock.

      But the interesting bit is that there is now some snow on that mountain when over the past 7 years there hasn't been ...

      Also -- it seems to coincide with the "rate increase fever" over the past year or so. It's a case where prudence (trying to prevent the economy from overheating) is folly (it just primes the pump for a recession).

      Some speculation here ...

      Note Krugman's recent posts on how the bankers are the constituency for a rate increase:

      Maybe the profits of bankers selling loans and services based on discounting interest rates from an artificially high level (i.e. above IT trend) puts too much money in the economy and you get a "pile-up of snow" (above trend growth) that sets up conditions for an "avalanche" (recession).

    2. Pardon my iggerance, but who is being prudent, or trying to be?

    3. I have seen Krugman's argument about the bankers and it seems plausible, but not terribly explanative. I have been thinking some of the resistance to keeping rates low might be the investment/hedge fund class as well, who have been suffering from a lack of safe, good yielding bonds as a decent alternative asset to stocks. Makes it harder to hit their benchmarks safely on a quarterly basis since no one can really invest in safe bonds/TIPS anymore.

    4. Bill, "Pardon my iggerance" ... was that intentional?

    5. Tom,

      Just how iggerant do you think I am? ;)


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