JPM Comes Out Against Bernanke's Helicopter: "Raising Inflation Expectations Is A Bad Idea"

Tyler Durden's picture

As we explained over two months ago, and as the Fed is no doubt contemplating currently, the primary topic on the agenda of central bankers everywhere and certainly in the Marriner Eccles building, is how to boost inflation expectations as much as possible, preferably without doing a thing and merely jawboning "forward expectations" (or more explicitly through the much discussed nominal GDP targeting) in order to slowly but surely or very rapidly and even more surely, get to the core problem facing the developed world: an untenable mountain of debt, and specifically, inflating it away. Of course, higher rates without a concurrent pick up in economic activity means a stock market tumble, both in developed and emerging countries, as the Taper experiment over the summer showed so vividly, which in turn would crush what many agree is the Fed's only achievement over the past 5 years - creating and nurturing the "wealth effect" resulting from record high asset prices, which provides lubrication for financial conditions and permits the proper functioning of capital markets. Perhaps this is the main concern voiced by JPM's chief US economist Michael Feroli who today has issued an interesting piece titled simply enough: "Raising inflation expectations: a bad idea." Is this the first shot across the bow of a Fed which may announce its first taper as soon as two weeks from today, in order to gradually start pushing inflation expectations higher?

And if so, it provides an interesting perspective of where on the reflation debate the big banks - easily the biggest beneficiaries of the Fed's ultra loose policies - and specifically JPM, whose $550 billion in excess deposits exist only thanks to QE, will stand once the Fed shifts from ultra easy to, well, less than ultra easy mode.

Said otherwise, are the TBTF megabanks about to fight the Fed?

Full note from JPM's Michael Feroli below:

Raising inflation expectations: a bad idea
Ever since the Great Recession there have been repeated calls for the Fed to raise its inflation target, thereby increasing inflation expectations and hopefully speeding the recovery. We have viewed this strategy as ill-advised. Encouragingly, two separate strands of research give support to our view, and make us more confident that the Fed will not go down this path. It is important to emphasize that our thinking and the thinking contained in the Fed research does not oppose a higher inflation target simply out of distaste for higher inflation, but instead because a higher inflation target could have some immediate adverse consequences for growth and employment. We also note that this critique applies not only to policy measures that directly raise the inflation target, but also to ones that could do so through the “back door,” such as nominal GDP targeting.
The case for

The argument for higher inflation expectations takes a few forms. The most conventional such argument stresses the fact that higher inflation expectations will lower real interest rates. Recall that nominal interest rates equal real interest rates plus expected inflation. If nominal interest rates are unchanged, then a rise in inflation expectations serves to reduce real interest rates. Since real interest rates are believed to be what matters for economic activity, lower real interest rates imply more investment spending, greater home sales, and so on. When short-term nominal interest rates are already at zero and thus constrained from falling any further, the improvement that can be engineered by raising inflation expectations – and lowering real interest rates – is particularly appealing, as it appears to be one of the few ways that central banks can further stimulate the economy without relying on fiscal coordination.
The case against

If the world we lived in were the world of textbook economics, then raising inflation expectations would quickly get the economy back to full employment. Unfortunately the world is not that simple. One simple complication is the fact that if you are reading this note you probably already follow the Federal Reserve more than the average person. Former Fed Vice Chair Frederick Schultz remarked in 1979 that "most people thought the Federal Reserve was either a bonded bourbon or a branch of the National Guard.” While public awareness of the Fed has increased since then, Main Street businesses and consumers still probably pay little attention to Fed edicts, whereas financial market participants are likely to read FOMC statements, to know that Yellen is a dove, Plosser a hawk, and to understand that the Fed’s long-run inflation goal is 2 percent.
These market participants are likely to immediately react to any hint that the Fed is raising its inflation target, and the reaction would come in the form of higher long-term nominal interest rates, as lenders would demand a higher premium for inflation compensation. Since Main Street businesses and households are less prone to hang on the Fed’s every word, their inflation expectations will be less affected by FOMC pronouncements, and a rise in nominal interest rates would be seen as a rise in real interest rates. Thus, raising the inflation target would increase nominal interest rates, and with inflation expectations outside of the financial sector essentially unchanged, this would mean higher real interest rates and a slower recovery.

A recent research paper produced by senior Federal Reserve staff received considerable financial market attention, mostly due to its discussion of threshold-based forward guidance. However, the paper – “The Federal Reserve's Framework for Monetary Policy, Recent Changes and New Questions” – also explored raising the inflation target. In an environment similar to the one described above, the paper's authors simulate a model and find "part of the increase in nominal bond rates perceived by non-financial agents is perceived as a real phenomenon, leading to a reduction in expenditures and prices in the short run." In sum, formal economic modeling confirms the commonplace intuition that a rise in inflation expectations can be damaging for growth.
A separate critique of this strategy has been discussed by Lars E.O. Svensson -- a leading macroeconomist, former Princeton colleague of Bernanke, and recently a deputy governor of the Swedish Riksbank. Svensson recently argued that if a central bank successfully stabilizes inflation expectations, then there is a trade-off between inflation and employment, and higher inflation means lower employment. However, it is inflation relative to inflation expectations that matter for employment -- for a given level of realized inflation, higher inflation expectations means higher unemployment. Svensson gives the intuition as “Suppose that nominal wages are set in negotiations a year in advance to achieve a particular target real wage next year at the price level expected for that year…If actual inflation over the coming year then falls short of the inflation target, the price level next year will be lower than anticipated, and the real wage will be higher than the target real wage. This will lead to lower employment and higher unemployment.” When average inflation is below a credible inflation target, it results in higher unemployment. The challenge for a central bank in this situation is to create the demand conditions that will stimulate actual inflation. However, simply raising inflation expectations could be counterproductive – even more actual inflation will need to be realized for there not to be employment loss with a higher inflation target. Generating that actual inflation has proved to be challenging for developed market central banks around the world.
Watch out for the back door

Simply announcing a higher inflation target could lead to higher real interest rates and, ex-post, higher real wages and thus lower employment. There are other ways this outcome can arise. In particular, nominal GDP targeting could have the same effect. Under this approach, the Fed would choose a target path for nominal GDP and keep policy accommodative so long as actual nominal GDP was below that target. Nominal GDP growth can be decomposed into real GDP growth plus inflation. If trend real GDP growth disappoints, then the shortfall in nominal GDP growth would need to be made up in a higher inflation target -- leading to the same growth-inhibiting concerns about a higher announced inflation target described earlier. This concern seems particularly relevant at this juncture as many believe (including us) that the Fed is at risk of overestimating the trend in real GDP growth.
The argument for raising the inflation target is not hopeless, but must be carried out in the context of a more comprehensive stimulus plan. Christina Romer has noted how the American New Deal and present-day Japan share an aspiration to affect a regime shift in expectations. Note, however, that in both situations expectations management was complemented by action in both the monetary and fiscal realms. A central bank going it alone to raise inflation expectations can create a situation that might backfire on growth. This is why we believe that even under the leadership of a Chairman like Yellen who is undoubtedly committed to the Fed’s employment mandate, the FOMC will not undertake policy actions that lift inflation expectations above a level consistent with the 2 percent long-run goal.

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stinkhammer's picture

fucking amatuers    send us a toe and what? we're supposed to shit ourselves with fear?   fucking amatuers

Dear Infinity's picture

Wouldn't it be nice if for once the people could just hold onto their purchasing power? Jesus. Why do we even glorify these bastards by committing their names to memory?

TruthInSunshine's picture

JPM is panicking.

Krugman is correct; get the only people who were prudent enough to actually save over the years (the quite distinct minority of Americans) to deplete the rest of their savings on higher priced necessities, disposable consumer goods & to invest in risky & volatile "assets" based on Fed-induced inflationary fears, and it will fix everything - eventually.

It's the "paradox of thrift" prudent savers, who are responsible and sane, that are ruining things for the reckless, irresponsible, debt-loving serfs, and thus, the general economy, damnit.


kliguy38's picture

Its simply Malinvestment and is responsible for the coming implosion of the empire. We bailed out the bankers and destroyed the strong hands that may have led us out of this..........besides we're busy watching football

dryam's picture

I love how banks always try to deflect and redirect.  They pretend to be against the Fed.

The real power to inflate lies in the hands of the banks who make loans in our debt based fractional reserve money system, it does not come from Fed money printing.  If the banks don't lend, then there's massive contraction of the money supply.  The amount of money being printed by the Fed pales in orders of magnitude to the amount of money that can be created via bank lending.

The TBTF's would be given ample warning prior to any type of tapering by the Fed.  They would get out of the equities, and go short.  This would provide massive gains during the crash.  They then would take their profits & sink them into real assets.  This would be mission accomplished for the Fed as the previously massively insolvent banks would then become completely solvent.  I do not think the Fed cares how high or low the stock market is.  The stock market is just a by-poduct in trying to attain their ultimate goal.

TruthInSunshine's picture

JPM only has the balls to proclaim such things as long as the aggregate amount of free fiat being shoveled into their coffers by the New York Federal Reserve Branch outweighs the fiat losses they're booking day to day.

Vampyroteuthis infernalis's picture

The Fed cares less when the sheeple complain about their corrupt ways. When the morgue speaks, the Fed WILL listen.

MeelionDollerBogus's picture

yup. We won't get the inside info so it takes balls to position early for it.
hvu, vxx, maybe spxu or faz.

chart this to see if it's constant : HVU * SPY^11 = 19.8444^19.8444

if so: HVU = 19.8444 19.8444 / SPY11

SPY = (19.8444^19.8444/HVU)(1/11)

DadzMad's picture

Great post; however, I threw up a little in my mouth when I read "Krugman is correct".  Glad I was able to keep reading.

nope-1004's picture

JPM needs monthly bailouts.  I call no taper, unless the Fed and banksters have decided to sink the ship themselves.


max2205's picture

Monday you could feel the you can see it....if aapl closes red the bulls are dead....Jessie Jackson

Gamma735's picture

Maybe the Grinch Bernake will steal Christmas this year

Al Huxley's picture

Its been a few days since the taper boys have had anything to say, aren't they due for an appearance?

andypaps28's picture

"Raising inflation expectations: a bad idea." Is this the first shot across the bow of a Fed which may announce its first taper as soon as two weeks from today, in order to gradually start pushing inflation expectations higher?


No it's not. It's 1,000,000-1 that they will taper in December. 

I would argue that a taper would cause deflationary expectations as 

1) Less liquidity

2) Asset bubbles burst

3) Everyone shit scare about what it means and the uncertainty causes investment / purchasing decisions to be put off. That's all deflationary in my book.

Ham-bone's picture taper.  Trim purchases by $10 B or $5 B/mo???  Starting some undefined time w/ some undefined reduction curve w/ some unknown metrics for it's follow through...I get that flow really matters but there is a big stock that could come back in on us like a tsunami...and if the Fed wants inflation, unleash the cracken of reserve dollars sitting fallow overseas!!! 

Seems the elepant in the room (sorry to mix metaphors) is the petro-dollar - Treasury creating Trillion plus new dollars annually past 5yrs into a world ever more rapidly moving away from a single $ based currency for buying oil.  So this $4-$7-$??? Trillion of FX reserves being held outside the US that was generally earmarked for buying oil is doing so less and less.  But this money is to be used for something...buying something among those nations no longer buying oil in dollars...even those nations previously exporting significant oil but due to higher demand @ home export less/ none.  Too many dollars floating in a system requiring less?  Even if it's 10%, 20%, quickly get the idea we are talking $400 B or $800 B or $2 T moving back into US equities/ RE /CRE / and yes, bonds (all likely w/ a bit of leverage).  As the yuan has now displaced the Euro as #2 held FX, all these dollars in reserves are freed up to go somewhere...Things move slowly until sometimes they suddenly move quickly.

Seems the Fed could "taper" some or maybe even all (?) purchases into an environment such as this and point out that QE has succeeded and no longer is neccessary???  They can point to all the eager buyers...

Junk away and riddle this with holes as I'm just noodling this...seems ZH is one of last free markets, at least for free thinking.

NEOSERF's picture

Everything is moving higher...except wages and disposable income, and these are the twin buzzards of chaos that will sweep the globe in time.

Al Huxley's picture

No, the big boots of surveillance, automated punitive force, modern propaganda and cheap distractions and trinkets will ensure that the majority transition peacefully back to serfdom.  So far so good...

MeelionDollerBogus's picture

Except in Kiev. And Thailand. And I hear Syria's still got a few hotspots (/understatement).
Unrest happens a-plenty in China and even in Israel (and sometimes it's the Israeli invaders against their own government rather than their slaves aka the rightful owners of the land, Palestine.

How's Greece & Italy?
They only throw firebombs at police once a week now in Greece, right?
And only ONE attempt to burn down a Goldman Sachs building in Italy?
Sounds peaceful to me!

aVileRat's picture

In line with Bill G's repost earlier. No bond fund is going to chase yield out into the negative zone where they WILL be taking losses someday, that's just asking for lawsuits & breaking your policy mandates. Without bond funds walking into the woodchipper, there will be no negative bound as their rotation into lower risk from high-spec duration plays will force the yield to reflate. This is the most crytalline of the 'pushing on a string' that any reaction function quant could ask for.

Retail investors and consumers know this. Overcapacity and overstock is rife, be it Potash or GM. With irony, the Krugman 'export centered' growth model I think is now (happily)  debunked when applied to the reserve base economy for everything but monetary debasement. Next generation Romer's should be excited at all this fresh new data to mine.

Likely, corporates will also follow bondking out the door. As US demand and paper continue to collapse there will be a global shift towards regional trade to stimulate immigration of high-productive talent and growth equity.The only way America will redevelop their industrial base is when it becomes too expensive for the 'average' US to afford imports and begins to buy America. Since Tariffs are impossible (as proven in 1970), the only way is to amp the price. Thus, inflation will continue inorder to restart the local base, even if this means a very painful restructuring of the labour cohort from java script kiddies & home flippers/agents to rig workers and manufacturing outlets.

yogibear's picture

Can't wait until those piled on derivatives blow. So much leverage out there now.

So much "stuff". Consumers are tapped out again. All the inventory is stacking up.

semperfi's picture

anything these fuckers say out in public is just meant to distract the dumass sheeple - if they don't keep printing then their empire burns to the ground and they are out of power - ain't gonna happen

maskone909's picture

i hear alot of talk of the pboc not buying any more treasuries.  if that is the case, they CANT taper.  if thatis the case, watch everyone stop buying treasuries

TruthInSunshine's picture

The PBOC has a full agenda in printing enough Renminbi to keep Chinese provincial banks afloat day-to-day.

maskone909's picture

if gold for oil is the new norm, china, russia, india, ect  have been preparing for this for quite some time.  there will be no incentive for anyone to hold treasuries unless we suddenly become the new saudia arabia and demend trade via usd

TruthInSunshine's picture

I heard bitcoin, litecoin & BuzzLightyearCoin for oil was the new norm.

maskone909's picture

they have been buying that too

Ham-bone's picture

ancient chinese what they do, not what they say (remember, these are politicians regardless nationality talking to their "base")!  No Chinese or any other nation selling T's as of yet (still in record territory...all Fed purchases coming from domestic sources...even if this seems il-logical) though the Chinese certainly are ramping up the yuan in foreign trade...overtaking the Euro for #2...

wish it wasn't always contradictions but so it goes.

Quinvarius's picture

This reads like an argument for double stimulus to me.  They want banking and public bailouts together.

RaceToTheBottom's picture

The Bernank knows it is time to move on when your co-conspirators are trying to throw you under the bus.

JPM know the FED will push for inflation.  That part has been part of the original design. 

They also know the FED cannot taper.  JPM is just positioning to be able to say I told you so when TSHTF

Papasmurf's picture

There is no point in trying to recapitalize the banks through QE until you prosecute the theft that loots them.

NOTaREALmerican's picture

Wait a sec... 

JPM doesn't want inflation?   So that makes them "good guys" today.   The Fed wants inflation that makes the "bad guys", as always.

I hate it when the conspiracy participants don't stick to the simple script.

vote_libertarian_party's picture

said another way:



JPM is massively levered in 3x short funds and needs a stock market crash STAT!!!

MeelionDollerBogus's picture

You'd think 3x shorts would be good but check out that HVU (tsx): it's like a -11x multiplier to the SPY, much more extreme than FAZ or VXX.

A drop to 100 on SPY could send HVU well over 5,000 and it's already at 9.10, hit peak 9.50 today and was under 8 just over a week ago.

Debeachesand Jerseyshores's picture

From I get from this article, is that the American Taxpayer is totally FUCKED no matter what the Fed does.

buzzsaw99's picture

translation: we got ours, fuck the rest of y'all.

ThisIsBob's picture

If you know JPM's book, you know their gospel.  Same with Bill and Mo.

evernewecon's picture



It makes no sense to say 

recovery and QE in the same

sentence unless recovery's 

really suddenly appearing.


Here's what happened during 

the last aborted taper.

Rising Mortgage Rates, Home Prices a Lethal Brew

(Diana Olick's Realtycheck)

Call it 7 days in May?


The main thing is older folks 

rolling high rate retirement 

instruments into long new paper

should realize when rates rise

it requires less principal for

comparable return.

Today's bubble is far more 

serious than the one in '81,

and back then I knew of retirees

who got killed on fixed income

related losses.

(just discussion--not 

advice/not forecasting 

(it's cloudy out but I don't

know if it's going to rain.)) 


Carrying sovereign

debt supporting bank assets

is easily eliminated, but it 

requires ending TBTF's loss



Mutual debt cancellation 

with Japan could work like 



Break Up A Large Bank On Each

Side Of The Pacific, Segregating

Each Other's Independent

Bank-To-Bank Debt First,

For Mutual Cancellation.

Then, Sovereign Debt 

Segregated Into The Loser

Offshoots Will Be Paid To

The Tune Of A Small 

Percentage Each Per 

Reformation Along Time.

That Is, No Sovereign Default

Will Exist Owing To Pre-

Packaged Reformation 


In Any Event, As Both Banks

And Both Sovereigns Are

On Board, Simply No Default

Could Ever Be Called.




That's Actually New

Liquidity To The Respective

Banks, Which Can Be 

Used For Ongoing Business

Or For Facilitating Wind-Down,

Where One Or The Other 

Government Deems The 

Subject Offshoot Best Suited

For Resolution Trust Corp.-

Type Treatment.



The Above Is Total

Child's Play Absent TBTF.


As to immunity from losses,

note the health insurance 

industry is immune from anti-trust.




















Clowns on Acid's picture

Dude - looks like you have been channeling feckin' O. Henry here... pull yourself toward yourself.

Clowns on Acid's picture

This author really should be publicly bullwhipped. Does she (indeed one can hear the sly, oh so sensitive... take the knife in your back, lullaby) really think that that the Fed can manage expectations to such a granular level as to thread the needle on actual vs expected inflation, and "control" interest rates at the same time ... in the largets economy in the world?? Seriuosly where da fuck to these fabian m'ther'fckrs come from?

"The challenge for a central bank in this situation is to create the demand conditions that will stimulate actual inflation. However, simply raising inflation expectations could be counterproductive – even more actual inflation will need to be realized for there not to be employment loss with a higher inflation target. Generating that actual inflation has proved to be challenging for developed market central banks around the world."

WTF...!! Are these fucksticks actually saying that the sheeple must be fooled so that there is actual inflation (i.e. real estate... to bail out underwater shitpaper in banks, ergo 127T in Int rate swaps) w/o sheeple realizing that they are getting fucked and that they won't demand push for higher wages ? Or go out and buy / hoard reflecting inflationary expectations? 

"The argument for raising the inflation target is not hopeless, but must be carried out in the context of a more comprehensive stimulus plan. Christina Romer has noted how the American New Deal and present-day Japan share an aspiration to affect a regime shift in expectations. Note, however, that in both situations expectations management was complemented by action in both the monetary and fiscal realms"

Now you know that the JPM author is a feckin', fabian fuckstick. Anyone mentioning  Romer and the FDR New Deal in the same sentence is pushing for the ObamaCrats to increase spending on "get to work" infrastructure projects. BUt don't we have those in the "green" energy field with 1oo's of billions in grants to Al Goreans and Teslaynians out there already ?

OldE_Ant's picture

FED wants inflation, Government doesn't.  Government keeps changing numbers so reported inflation doesn't cost it more.

Perhaps the FED should calculate inflation the way the government USED to calculate it rather than using the constantly reduced (manipulated) downwards inflation numbers the government calculates.

In reality perhaps the FED should climb out of their ivory towers and learn about what is really going on.  Then again someone might actually tell them what to do with themselves.


NoCrazies's picture

If I was a bank sitting on Trillions in 15 -30 year fixed rate mortgages; I would lose sleep at night thinking about inflation or hyperinflation.

Againstthelie's picture

So many words to hide the fact, that big company profits are at record highs, Wall St. is profiting from the FED's current policy and the people working productively earn an ever shrinking part of GDP.

Solution: do what Adolf Hitler did. Just force the companies to share their profits with the ones who are responsible for it, the workers and employees, cut the bonuses of the hydrocephali 90%, throw the banksters and parasites into jail and give them a shovel and a pickaxe to learn honest labor. But this would mean throwing Washington into jail and so the charade and lies will continue until the ponzi debt slavery one day will collapse.

MeelionDollerBogus's picture

PRETTY sure Hitler did none of that.

Ned Zeppelin's picture

Between the nonsense, I don't think this article says anything more than "Yellen, keep your foot on the gas." This article never for a moment even questions the wisdom of economies managed by banking politburos, merely suggests the settings to the various dials they play with.   The banks LOVE this excessive federal debt and printing festival.  Debt means the sweetest collateral of all, Federal treasuries, which can be hypothecated endlessly, and the free money to use to leverage them with.   Bernanke and Co. are doing all they could have been asked to do by the likes of JPM.