Friday, February 17, 2012

Entre la espada y la pared?

As I've been droning on about, the Fed has promised to (a) keep rates near zero until at least the second half of 2014, and (b) keep inflation at or below an upper limit of 2%.

The latest report on the CPI came out today.

Behold (clic the pic for a more glorious image):

CPI inflation (blue line) is currently 2.9%. CPI less food and energy inflation (red line) has now climbed over 2% and is trending upward.

Something has got to give. Either the recovery falters or the Fed has to take a pass on one of its promises

Yes, I know that the Fed target is probably some genetically modified version of the GDP deflator.

Here's a slightly less updated inflation graph using the deflator for personal consumption expenditures (from Tim Duy at Mark Thoma):

Even this cherry picked series is over 2% and the series less food and energy is trending up and poised to hit 2%.

Please understand that I am not advocating that the Fed tighten policy right now. I think 3 or 4 percent inflation for a while would not be a disaster.

I am saying that the Fed has made some very strange promises of late that don't bode well for its vaunted "credibility".


Anonymous said...

freakin monetarists are so clueless. What's the point

Jim Glass said...

"The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.34 percent..."

When setting policy to affect the *future* course of the economy you want to look at the *future* inflation currently expected by the financial markets.

The last reported inflation rate is from a few months ago and resulted from actions taken well before that. Using that to set policy is like steering your car by what you see in the rear view mirror.

The Fed is well under its inflation target, undershooting.

As it is also well over its unemployment target, the policy to follow should not be difficult to divine.

Jim Glass said...

BTW, even the rear-view mirror shows the road turning with inflation already falling below the Fed's target.

Increase in CPIU at an annual rate:

12 months: 2.93%
6 months: 1.78%
3 months: 1.24%

Looking only at year-to-year numbers can cause one not to see a turn in the road that occured six months ago.

Angus said...

OMG!! the FED said that the FED is doing a great job???

Holy Spumoli!! Stop the presses.

yes overall cpi growth is decelerating, but it's from food and energy price growth declining. "core" cpi growth is rising as is "core" PCE deflator growth. When inflation rises due to food and energy, we are supposed to ignore it. I think the same should apply when it falls.

Look. like I said in the post, I would NOT be unhappy with a significantly higher inflation rate or inflation target. I am not in favor of monetary austerity.

I am just surprised at how clumsy the Fed is acting in their attempts to be more transparent and to "guide expectations". I think the US economic recovery has finally started going and the Fed has made promises that are mutually inconsistent in a strongly growing economy.

John Patty said...

Transparent monetary policy doesn't (or at least isn't supposed to) work, right? I have no idea if what the Fed is doing is the best policy, and I was surprised by the temporal extent of Bernanke's projection, but I also see a clear argument that says the Fed is supposed to (try to) fool the markets for now. After all, monetary stability is a (very important) confidence game. As long as everyone suspects that everyone else suspects that there will be a stream of free money for the near future, financial stability might be preserved.

Jim Glass said...

OMG!! the FED said that the FED is doing a great job???

Who said that the Fed said it is doing a great job?

I see the Fed pointing to market data saying the markets expect 1.34% inflation over the next ten years. (Does the Fed determine what the market sets as the inflation factor in inflation indexed bonds? )

If you think there is anything actually wrong in the market data and analysis reachable through the link it would be more persuasive to cite and criticize it ... I mean, compared spitting you spumoli and going "OMG!!" like a teenage girl texting. :-)

Or perhaps you do think that setting policy to hit future targets is best done by ignoring forward-looking market expectations, and driving by the rear-view mirror after all?

(And while I don't put much weight on backward-looking numbers for forward-looking purposes myself, I do find it amusing how when core inflation is below headline inflation so many people go "but that's ignoring food and energy!", while when headline inflaton falls the same people go "but that's just because of food and energy!")

Jim Glass said...

BTW, as to:

"core" cpi growth is rising as is "core" PCE deflator growth.

CPI ex food and energy, annual rate:

12 mos: 2.27%
6 mos: 2.07%
3 mos: 2.17%

PCE ex food and energy, annual rate:

12 mos: 1.85%
6 mos: 1.45%
3 mos: 1.40%