Fedwatch: How much high a pressure can the economy handle?

Ever since Janet Yellen made that her "high pressured economy" speech, market analysts have been scrambling to understand what she meant by that term. The Fed Chair used that term in the context of a research conference held at the Boston Fed. So was it an academic musing, or was it a hint of a subtle shift in Fed policy?

The chart below shows the number of instances in the last 12 months when Core PCE has exceeded 2%, which is the Fed's inflation target. As the chart shows, the FOMC has tended to start a tightening cycle whenever the rolling count has hit six. The only exception occurred in 2011, when Europe mired in a Greek debt crisis.

The latest September Core PCE reading, which was released today, came in an annualized 1.7%, which was short of the 2% target. With the current count at five and therefore nearing the threshold for a tightening cycle, the question of the degree of tolerance for higher pressure in an economy is an important issue for monetary policy.

The full post can be found at our new site here.

Bayesianism versus Smoothing: In Which I Surrender Unconditionally to Cosma Shalizi

Surrender alesia Google Search

I think it is time for me to issue an unconditional intellectual surrender to Cosma Shalizi. Watching Nate Silver and his now http://fivethirtyeight.com over the past two election cycles has convinced me that the Bayesian framework he throws around his model is a major obstacle to people's understanding what is going on.

What is going on is made up of three things:

  1. Polling--that is, asking people what they think of the election candidates in a structured way.

  2. Aggregation--so that you are not just using one sample of 1000 to assess the current mood of the electorate but instead have something like 1/5 of the sampling standard error.

  3. Smoothing--imposing structure on the time series, both that it ought to be close to "fundamentals" and that it ought not to change too quickly.

But next to nobody reading Nate Silver and company's "nowcast", "polls-only", and "polls-plus" forecast probabilities as they evolve overtime gets any sense of how the sausage is made.

It remains the case that the decision theorist in the subbasement dungeon of my brain whimpers that Bayesian posterior probabilities are what we ultimately want.

But, these days, when it says that, I gag and shorten its chain:

  1. I point out to it that what we really want as decision theorists are not Bayesian posterior probabilities but rather the misnamed "risk neutral probabilities" that are posterior odds times the utility of the outcome.

  2. I point out to it that if we are betting against other minds we need to know in what ways their information sets might be superior to ours and what disadvantage that puts us at: that invulnerability to a Dutch Book is a third-order consideration in a world in which others might will know of jacks of spades that will piss in your ear on command.

  3. And I point out to it that the answer to the frequentest question, "how different might our conclusions have been had we drawn a different sample?" provides much more insight into whether our procedures are converging to something sensible than any ex-ante Bayesian proof that we knew in advance, before we start the analysis, that our procedures must converge.

So go visit Sam Wang: polls, aggregation, soothing, plus not unreasonable random drift strike zones are more helpful than three different sets of posterior odds--given my suspicion that there is right now no action from the 538.com stuff on the truck side of the polls plus odds...

bradford-delong.com: Grasping Reality with the Invisible Hand… 2016-10-31 21:36:25

Caitlin MacNiel: Sucks To Be You! Trump Won’t Pay Pollster Almost A Million Bucks: "Donald Trump is stiffing the first pollster his presidential campaign hired--to the tune of almost $1 million.... The Trump campaign would not comment.... Fabrizio, a veteran GOP pollster, was hired by the Trump campaign in May at the recommendation of Paul Manafort, who has since left the campaign..." (Live from the Republicans' Self-Made Trump Hell)

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