I almost feel bad piling on Scott, because although I disagree with his monetary views tremendously, I actually think he’s a cool guy with a good sense of humor. But this is science; we must be merciless.
When the news broke yesterday that Larry Summers was pulling his name out of the running for Fed chief, Scott wrote a post titled, “S&P futures soar 17 points (1%) on Summers dropping out.” Here are some excerpts from that post:
God I love seeing financial markets respond to monetary policy news. Now let’s see the Fed do something exciting on Wednesday. And for God’s sake, let’s get an NGDP futures market up and running.
Update: Taking into account the fact that there was already some expectation Summers would drop out, I’d guess his decision created upwards of a trillion dollars in new global stock market wealth. Not bad!
Monetary policy is really, really important.
There was just one little wrinkle in Scott’s victory party. The very news article that he quoted, in order to show how the Summers announcement drove up stock prices, also said: “In debt markets, futures for the U.S. Treasury 10-year note leaped over a full point, a sizable move for Asian hours, as investors took yields lower.”
Now you’re thinking, “Duh, Yellen will buy more Treasury debt than Summers would have, so the price of Treasury debt went up and its yield went down.” But no, Scott has taken great pains to spank anyone espousing such a naive theory.
So today, Scott asked his readers (at the end of the post) if they had any data on TIPS spreads to get to the bottom of this mystery. Here’s how it played out, with Scott commenting on their findings:
Update: In the comment section John Hall has data suggesting not much impact on TIPS spreads, albeit the 10-year may be up a couple basis points. So real rates fell. Possible explanations:
1. Not much impact on NGDP expectations.
2. Significant impact on NGDP, but fairly flat SRAS.
3. Some market segmentation—TIPS spreads don’t precisely measure expected inflation changes.
Or perhaps a bit of each. If I had to guess I’d say NGDP expectations rose, but by a very small amount.
I don’t think I’m merely being a wiseguy by saying there’s a bit of an inconsistency in Scott’s commentary from yesterday to today, am I?