I
will make the case that recent developments in commodity prices can be
explained largely by rising global demand and disruptions to global
supply rather than by Federal Reserve policy.
This is an insane position for Ms. Yellen to take. There at least a
dozen separate public statements by Bernanke that the goal of QE is to
raise asset prices. Are commodities not assets? They are. And Yellen knows it.
When the Fed has ZIRP, cash seeks out higher risk investments to retain
some return. Again, Bernanke and all the other Fed governors have used
this line in defense of QE. Ben’s words from just six weeks ago in his “QE is working” speech to the National Press Club:
“Since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly.”
Does Ms. Yellen think Americans are stupid? That we don’t understand that monetary policy is a major driver in the economy? That cheap money does create bubbles in things like commodities and equities alike?
If Ms. Yellen is in doubt of that she should sit down with someone who
understands the connection full well. I think she should have a tea with
former Fed head Paul Volker. He would tell her the same as me. What she is trying to sell is just drivel.
With that off my chest let’s focus on the Fed’s credibility. I want them
to be more precise with their definitions of inflation. The Fed is
looking at Personal Consumption Expenditures as their definition of a
benchmark for inflation. I maintain that this is a bad matrix as it is backward looking.
Inflation is clearly rising. The Fed can’t just look into the rear-view
mirror to measure what is going on. They have to be pragmatic and look
to the future of inflation as well. There is one measure of future
inflationary expectations that is worth noting. The spread between 10-year TIPS and coupons is on the wide. Here’s the graph:
The Fed folks aren’t stupid and they know that inflation expectations drive reality. Yellen said so today:
Critically, so long as longer-run inflation expectations remain stable,
the increases seen thus far in commodity prices and headline consumer
inflation are not likely to…..warrant any substantial shift in the
stance of monetary policy.
Okay. We have her on her word. It is critical that inflationary expectations don’t get out of hand.
So here is my challenge to Ms. Yellen. Give us some firm guidance on
expectations of inflation. Use the 10-year TIPS/Coupon spread. When do
you get concerned? What ranges do you want? The Chairman has given us
firm targets on core (“ a little below 2%”). Give us reasonable ranges
on what inflationary expectations the Fed is shooting for.
Ms. Yellen teed this up today. She was the one that said that it was critical to contain expectations.
There has been a lot of talk about the Fed communicating its intentions
better. This would be a good opportunity. I will send this off to her. I
doubt I/we will hear a word. This Fed does not want to look forward.
They’re making a mistake. They should all ask Volker his thoughts on
this as well.
Note:
In the current environment where we have massive monetary stimulus I think that a 3% spread is coming. At that point the water is already boiling. If the Fed fails to react when markets are ringing alarm bells; they will have made their next historical mistake.
Ghost face, nice to see you around again.
Not all merkins are stupid. There are those of us in manufacturing that are fighting for our economic lives to lock in some other poor SOB to holding prices for steel, magnesium, and not so much in aluminum.
I am trying to get our micromill steel producer to throw away the ISO books on alloys and come up with something that restrains costs and gives better properties for our usage.
The savers are on the fourth year of getting killed on holding Yellen dollars, etc. They know a few things and are not as stupid as you assume. This is not going to turn out well.
BK's last one prior on the FED policy being a reaction to the very short lived down spike in commodities was a very good insight into the Yellen blather. That hag is still scared to death of the 2008 drop in commodities. What is she going to spout when the disdain for the USD as the clearing mechanism gets tossed?
Ms. Yellen is also on the record stating that she believes money-printing has created several million jobs.
She is a complete and total idiot.
Hand puppets, inner tubes and bananas are the future.