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When The FOMC Completely Loses The 'Inflation' Argument
Submitted by Jeffrey Snider via Alhambra Investment Partners,
Lost in all the stock market focus is the renewed disaster being signaled across credit markets, “inflation” expectations in particular. Here oil prices and the “dollar’s” darkening intersect with credit and broad financial settings. Quietly, market-based measures of the anticipated future “inflation” path have crashed. Inflation breakevens in TIPS hedging were as low yesterday as the lowest point from January 14 in the 5-year; seriously lower at the 10s. Even the Fed’s preferred market measure of expectations, the 5-year/5-year forward inflation calculation, dropped to a low not seen since the highly unstable days exactly five years ago, just before Bernanke uttered QE2 to 2010 Jackson Hole.
It may all seem outwardly as just a minor inconvenience for the FOMC battling “market” conditions on almost every front, but this is not a small or insignificant deviation. The fact of this second “wave” of crashing destinies is confirming on several fronts, none of which are favorable to the continued (somehow) dominant monetary view. Starting in December, the crash in oil prices was not unnoticed but rather publicly set aside.
From Janet Yellen’s December 2014 press conference, in the prepared remarks:
Inflation has continued to run below the Committee’s 2 percent objective, and the recent sizable declines in oil prices will likely hold down overall inflation in the near term. But as the effects of these oil price declines and other transitory factors dissipate and as resource utilization continues to rise, the Committee expects inflation to move gradually back toward its objective. In making this forecast, the Committee is mindful of the recent declines in market-based measures of inflation compensation. At this point, the Committee views these movements as likely to prove transitory, and survey-based measures of longer-term inflation expectations have remained stable. [emphasis added]
That view in favor of “survey-based” measures to disregard market-based prices was linked in short-term money rates that described expected future economic conditions that might (or should) accompany both deviating paths. From the December 2014 Policy Statement itself:
A couple of participants remarked on the apparent disparity between market-based measures of expected future U.S. short-term interest rates and projections for short-term rates based on surveys or based on the median of federal funds rate projections in the SEP. One participant noted that very low term premiums in market-based measures might explain at least some portion of this gap. Another possibility was that market-based measures might be assigning considerable weight to less favorable outcomes for the U.S. economy in which the federal funds rate would remain low for quite some time or fall back to very low levels in the future, whereas the projections in the SEP report the paths for the federal funds rate that participants see as appropriate given their views of the most likely evolution of inflation and real activity. [emphasis added]
This December focus, such that it might have been, was not unwarranted given how much turmoil there was at that time; from ruble to oil and “dollar” again, there was at least the first rumbles (for orthodox views) of gathering trouble dead-set against all the happy sureties of the 2015 finish line seeming so provocatively in view. In the first few months of 2015, that survey-based view, as well as the modeled SEP, seemed at least more plausible as “negative” TIPS pressures and oil prices did appear almost transitory even if they never fully (or all that much) retraced the first wave of decline. In other words, there was hope in that it stopped, for the moment, getting appreciably worse in this context.
More recently, of course, the SEP has revealed a somewhat different tone even if still not quite synchronized with gathering market-based expectations into this second wave. As the last policy statement admitted, the committee no longer expects to find the economy at its “inflation” target before some time into 2018 now.
The staff’s forecast for inflation was revised down, particularly in the near term, as the decline in crude oil prices over the intermeeting period was expected to result in lower consumer energy prices. Although energy prices and non-oil import prices were expected to begin rising steadily next year, the staff continued to project that inflation would be below the Committee’s longer run objective of 2 percent over 2016 and 2017.
That is a huge failure for monetary policy that counts upon “inflation” not only as a standard for effectiveness but really as the transition between its efforts and actual economic growth (ridiculous as that theory may be, as they are finding out). Oil prices and inflation breakevens, as noted at the outset, have gotten much, much worse since even that point.
The meaning here is very plain, in that not only were the survey-based measures missing the true economic vane but the Fed’s models were, yet once again, completely useless in determining actual economic fortune. This isn’t really much of a surprise given the circular nature of those models, always assuming monetarism works because monetarism is assumed to work, but in this context it is quite more damning. Again, the FOMC has been planning and basing its actions upon the notion that “transitory” oil prices were an aberration to gaining economic function, “resource utilization” and “gradually moving back to target.” Being proved wrong here thus places the economy far, far more likely conforming to those market-based assumptions, including “less favorable outcomes for the US economy”; which is, in light of recent indications, quite the understatement.
It can no longer be transitory, which extrapolates nowhere good for monetary policy, orthodox economics and the actual global economy. The theme for several years now has been that “they don’t know what they are doing” and once more we find that proven by “unexpected” events that were perfectly predictable outside the orthodox bubble. The combined indications of bearish credit, the actual, wholesale “dollar” and other global proxies was rather clear in where all this was going. This renewed wave is just confirmation of that which was apparent all along; confirmation not just in reality but more so now, as time marches, in terms of potential depth.
There is, of course, the rational expectations component that begs for “inflation” expectations derived solely from reassuring or soothing “predictions” from these “best and brightest”, but what happens when you promise “transitory” and deliver instead quite more confirmation that you had it all wrong all along?
For a policy commitment the size of four QE’s and almost seven years of ZIRP intended for both “inflation” and then aggregate demand, there remains not just a shocking lack of either but a quite clear reversal of fortune that is proving this year disturbingly durable. We entered 2015 with the FOMC claiming there was no downside even where markets were at least unsure, taking some consideration of some serious probability in that direction. By this second wave, it is no longer just some serious probability, as the FOMC as much admits by its own inaction as set against those prior versions of its own expectations. By confirming that market prices were right and now with those getting to worse levels (including a time factor here, it is, after all, the end of August meaning continued investigation toward the downside reaches so far almost a year), what does that do to further extrapolations, eight months hence now lost?
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Just cut IOER to 0% -- or better yet, -25 bps.
You want to see a deluge of lending crash across our we're-not-Zimbabwe economy? Pull that trigger, Janet.
END THE FED !
If Trump made one public statement about a over reaching private central bank (the Fed) he would have my support.
If he did that and subssequently garnered a lot of public support, the powers-that-be would go Full Kennedy on him. History is pretty ripe with people who push gold standards, anti-fed movements that are no longer with us.
-Argenta
Is anyones cost of living decreasing? Anyone? Anyone Buller?
Well, since we stopped feeding the cat beluga caviar and just give her plain canadian wild salmon, we kind of do!
And did you know that if you open a box of cookies and take one out, you can till eat the other cookies one hour later without opening another one!?! ... my wife tought me that little trick, she went to university!
If they REALLY want inflation it can be done very easily, just give every man, woman and child a million dollar "grant" tax free and watch the people go completely frigging stupid.......
If you stop to think about it for more than 2 seconds, the push for a national $15 minimum wage is precisely to cause inflation! The wage inflation of the 70s hasn't shown up yet, so they are determined to create it somehow, dammit!
Right there! Soon those seriously working for a living,,, roofers, tree trimmers, etc,,, will be making no more than a McD server or Walmart China shit pusher. Soon they will want a higher wage and up, up and away it goes... Close on their heels will be the price increases. Like a dog chasing its tail.
However, the minimum wage increases are so extreme that it will likely cause wage compression. Existing, more productive employees will stay at their ~$15/hr wages, get no raises, or very little, yet the new less productive employees will get a similar wage. And if you're "middle class", earning > $30 an hour, it's unlikely you'll get a meaningful raise, if one at all. But if you're part of a Union, that's another story.
Why worry Obama built up a standing army with his build-out of the DHS: in case anything goes wrong. The bankster's NWO government will protect us.
http://www.chapwoodindex.com/
Oligarchs messaging each other...
http://www.marketwatch.com/story/this-stock-market-gauge-predicts-double...
There was a great line in the first Jurrasic Park movie when doctor Grant attempted to respond to a question about the impact of introducing man and dinosaurs, the two most dominate species on the planet over the past 100 million years, and how anyone could possibly know what the eventual outcome would be. Well we all know how that ended so the same question has to be asked about today's economic environment. How can anyone possibly know what to expect when you introduce two of the most significant and intense economic forces, directly against one another.
That is, unrelenting deflationary forces resulting from years if not decades of mal-invested capital versus the insatiable greed, arrogance, and determination of CBs in their never ending attempt to inflate their way out of this mess! Or in other words, the Market versus Central Planners.
This battle has become so insane and surrealistic that what would have been unheard of economic policies a decade ago (e.g., direct monetization of soverign debt, negative interest rates, CBs directly buying equities and the most absurd of all, Chinese authorities looking to jail people for selling equities) are now considered the norm. If you asked a real economist about these policies and received a real answer they would without question note that these policies are beyond extreme and the result of a desperate attempt to save the system from imploding. I have no doubt that historians in 50 years will make this exact point but as for today, well let's just say we're living in never-never land hoping the fantasy never ends.
As for me, I'm betting on the market but not for another couple/three years as I figure TPTB including the CBs will make a couple more final and desperate attempts to salvage the system. But then again, who am I to make a prediction about timing but one thing is for sure. As we get deeper and deeper in the ride, the ending will without doubt be more violent, extreme, and volitile than any of us can possibly imagine!
IF they really wanted consumption spending/inflation they could do several things.
1. Lower the tax rates on the bottom 3 quintiles. Take everyone with an earned adjusted gross of $25K and under to ZERO Federal taxes. Stop taking it out of paychecks immediately.
2. Reinstate the deduction for credit card interest payments.
3. Reinstate bankruptcy provision for annuling student loan debts.
4. Exempt standard ( 23 weeks ) unemployment benefits from Federal taxation.
5. Revoke ACA taxation ( 'shared responsibility payments ' ) for failure to purchase health insurance.
Overall deflation first, last a couple years (maybe hold off on adding to gold) then it all snaps back to hyperinflation with currency collapse. But deflation first, as commodities are indicating. Looking forward to the new world order that emerges...for our own good obviously.
Long article... So we should have expected deflation all along, is that it?
There's a big deflation and inflation tug-of-war going on with the FED pushing on the string for inflation and temporarily winning the battle in equities for their buddies at Goldman Sack but losing the greater economic war and this was all predictable based on reality and many fancy charts to back it up?
Is that it? What'd else did I miss while I wasn't asleep the last 3 years?
Guillotine the Fed. Audit the heads.
Zion is a scheme, not an ethnicity.
In a speech in March, Fed Chairwoman Janet Yellen said she wouldn’t feel comfortable raising short-term interest rates if core consumer-price inflation were to weaken.
Mont-over-month the core CPI ticked up 0.1% last month after rising 0.2% in June.
Year-over-year core CPI Index (ex Food and Energy) was up 1.8% from July 2014 but over the past three months, core prices also climbed at a 1.8% annualized rate.
This was the fourth time in 5 months the 12-month change was 1.8%.
And that’s down from a 2.6% annualized increase in the three months ended April, signaling emerging price pressures have subsided with the dollar strengthening recently putting renewed downward pressure on import prices.
And a 0.4% advance in the shelter index was the main contributor to the increase while the indexes for medical care and apparel also rose.
In contrast, the index for airline fares fell sharply, and the indexes for used cars and trucks, household furnishings and operations, and new vehicles all declined.
Core CPI has run below the Federal Reserve’s 2% objective for 38 straight months and ran at 1.3% from a year earlier for each of the first six months of the year.
The core CPI declined 0.2% in the 12 months ended in April, the biggest year-to-year drop since October 2009.
The energy index continues to show a 12-month decline, falling 14.8% over the past year while the food index increased 1.6% over the last 12 months but these are not included in FED’s core CPI.
Sources:
http://blogs.wsj.com/economics/2015/08/04/grand-central-signs-of-stability-in-core-inflation-should-comfort-fed-officials/
http://www.bloomberg.com/news/articles/2015-08-19/fed-inflation-goal-becoming-more-elusive-as-consumer-prices-cool
http://www.bloomberg.com/news/articles/2015-05-22/core-u-s-consumer-prices-rose-in-april-by-most-in-two-years