The Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate.
This sentence is open to some fairly wide interpretation. I think Ben was referring to inflation as something that is evaluated over an extended period of time and is best measured by the GDP deflator.
But that is not how the market may read it in a few months. A CPI print of .3 or even a .4 is not at all out of the cards at some point over the next Q. Multiply .3 X 12 and you get a running rate for inflation at 3.6%. While that is not what our boy Ben may have meant, that is how the market will read it. Ben has put out to the market that he might call off QE if inflation starts to get going toward 2%. He was pretty clear that he was prepared to back off in the speech:
The Committee stated that it would review its asset-purchase program regularly in light of incoming information and would adjust the program as needed to meet its objectives.
For me, it's a sure thing that we are going to see hot inflation prints in the next few months. There has been too much action in the broad commodities market for it not to show up. When it does people are going to be looking to Ben and calling his bluff. I read this comment by Ben as backing off. I would not be a buyer of long duration.
Posts
Bruce, I've just started following your Blog, and I'm a novice at this, so forgive me if these questions miss something, but ...
ReplyDeleteIn this post, you seem to be saying that you think Ben will abandon the QE2 programme if/when inflation gets out of hand. In contrast, in your most recent preceding post (ie, "Emerald Isle and the Golden State"), you say that it's almost a certainty that the Fed will have to step in to buy municipal bonds.
That's two postings on the same day that seem to be saying opposite things - the first one saying that there will be more money-printing, and the second saying that the whole money-printing idea will be abandoned because of inflation.
How are we meant to reconcile this? Am I missing something here??
Also, I know that commodity prices shot up in anticipation of the QE2 announcement, but the most recent core Producer Price Index results from 17 November show core inflation at super-low levels, and commodity prices have dropped since the QE2 announcement as well ... are you sure that higher commodity prices are really going to fuel inflation?
foot in mouth, for sure. Liars usually tell half-lies, I've heard. So while Bernanke is touting "no more than 2%", doesn't that likely mean "no more than 4%, after we cook the sh1t out of the books."?
ReplyDeleteWhen inflation does eventually break through America's sternum like an Alien, won't the Fed just defend their actions in evergreen fashion?
"You think this is bad? Let me tell you a tale about what would of happened had we not acted. It's called Rabid-Zombie Apocalypse America."
Bruce,
ReplyDeleteI see it as Benny and the Feds leaving the door open to more intervention. Face it; the Fed will do what it believes it needs to do to calm the choppy political seas heading into a national election.
As for inflation, it's here now in the form of higher prices for oil, gas corn, wheat, etc.
This hits families suffering from wage stagnation (if they're fortunate to earn a wage through employment).
The other time bomb the public faces is the pension time bomb. Bruce, you've written about this as has Steve Malanga.
States are in trouble: Illinois in estimated to be underfunded by 60 billion; Cook County (Illinois) is estimated to be underfunded by 20 billion (some estimate this number is closer to 40 billion because of overly optimistic models assuming 8% returns per year).
As you've pointed out it is not a stretch to see Fed intervention in Munis.
Question: When does the focus shift from the monetary side of the house to the fiscal side of the house?
I'm puzzled by your logic. It seems that inflation (core CPI) has been trending lower for some time (since about 2007 if memory serves). Why do you expect a surge in inflation rather than deflation?
ReplyDeleteAnon @2:46
ReplyDeleteI did not say I expected a surge in inflation.I said I expected some hot numbers for inflation over the next few months. I expect to see a few .3/.4 prints. That easily gets you back to the 2% annual number that Ben has suggested is his ceiling.
DL,
ReplyDeleteI am a blogger. I am allowed to be inconsistent.
Yes I think we are headed for a muni problem. Yes I see that there is no solution to that problem short of Muni QE. Do I think that Ben might do that? Left alone, I am sure that he would.
But he is no longer left alone. He has almost everyone in the world against him at this point.The cost of QE-2 is that the Fed has had to back off on its policy options.
I think I said in the Muni piece that if Ben did do a muni QE it would take us to the cliff. I stand by that. I think Ben has taken us to the cliff with QE-2. Why would he hesitate to bet all in after that?
In this piece I said that the MARKET would call his bluff. By that I meant that the market would force long term rates higher. That, in turn, will force Ben's hand.