Category Archives: Interest rates

Lessons from the 1970s and monetary policy today

In my previous analysis (link) I contrasted the Bundesbank and the Fed during the high-inflation episodes of the 1970s. I concluded that the Bundesbank fared better: German inflation was lower and less volatile. Today’s situation resembles the situation in the 1970s. What can monetary policymakers today learn from events back then? A lot, I think. At the same time it also seems as if some important lessons have been forgotten.

Continue reading

Lessons from the 1970s: Germany vs. U.S.

Today’s situation shares many similarities with the situation in the 1970s: Sky-high inflation, war, insufficient tightening of monetary policy, uncertainty about the economic outlook, and more. Countries responded differently to the events back then, though. I analyse the reactions of the German and U.S. central banks and emphasize lessons relevant for today. My next analysis will examine what current monetary policy can learn from those experiences.

Continue reading

Yield spreads and recessions

The slope of the yield curve, or the yield spread, has consistently predicted recessions. Following a flattening of the yield curve–a rise in yields on short-dated government bonds relative to yields on long-dated government bonds–the economy often contracts. There are different yield spreads, though. Right now some indicate that we are heading for a recession while others imply low recession probabilities. Which ones should you rely upon and what are the implications? I analyse data from the US and Europe (Germany) and provide answers.

Continue reading

ECB’s dilemma: Choosing between the devil (raise rates) and the deep blue sea (don’t raise rates)

Inflation in the Eurozone is historically high. One would expect that the European Central Bank (the ECB) would only talk about raising rates. Instead, they only talk about keeping rates low, in contrast to other central banks. Why is the ECB so strongly ruling out even the possibility that rates might be raised? Probably because there are highly indebted countries in the Eurozone that would suffer. The ECB is caught in a dilemma: Raise rates and risk that Italy (and other countries) will face debt-servicing challenges or keep rates low and risk that inflation remains too high. What to do?

Continue reading

From Main St. to Wall St.: The business cycle

What is the relation between economic activity and the stock market over the business cycle? This blog post presents some of the conclusions from my book From Main Street to Wall Street. One conclusion is that the business cycle has a strong impact on the stock market, another that post-1945 business-cycle dynamics are very different from pre-1945 business-cycle dynamics.

Continue reading

Expected returns, spring 2021 forecasts

Today, May 4, 2021, the Council for Return Expectations publishes its updated forecasts. We still expect very low – negative – returns on safe assets, though not as negative as we expected six months ago. We also expect marginally lower returns on risky assets. Compared to six months ago, we thus expect a lower equity risk premium.

Continue reading

Yields and inflation expectations

During the last couple of weeks, yields have been rising and stock markets falling. Standard market turbulence is not interesting for this blog – stocks go up and down, most of the time up, and yields fluctuate – but intriguing (and expected) patterns characterize recent events.

Everybody seems to agree what is going on markets these weeks: Vaccines are successful and being rolled out, so economies will open up soon, and Biden will get his stimulus package to the tune of USD1.9tn. These two things (an already strong economy when opening up and on top of that a large stimulus package) will lead to very strong growth during the second half of 2021. Inflation will rise and the Fed will have to tighten monetary policy. The expected rise in inflation and the policy rate leads to increases in yields today. This hurts stocks. These US developments spill over to other countries.

This story largely makes sense. Looking at the data, however, interesting outstanding issues remain.

Continue reading