Posts filed under “Inflation”

The FOMC Minutes …QE3 And Inflation

Click to enlarge:


The Wall Street Journal – John Hilsenrath and Matt Phillips: Fed Holds Fire on Stimulus
The Fed is in no hurry to launch new measures to boost economic growth, minutes from the central bank’s most recent meeting showed, disappointing investors eager for more stimulus. Among the hints dropped in minutes of the Fed’s March 13 policy gathering, Federal Reserve staff concluded that the U.S. economy is a little more susceptible to inflation than previously thought. That and other signals suggested that another round of bond buying by the Fed to push down long-term interest rates isn’t imminent. The minutes are written without specific staff forecasts or naming any officials. Still, they were written in a way that made clear Fed staff hadn’t made dramatic revisions to their forecast. The minutes showed that Fed officials themselves are very much divided over slack. One Fed official argued at the meeting that the economy was “much closer” to using up its idle resources than previously thought. “A few” officials thought the economy had emerged from recession with less potential to grow without causing inflation.Other officials said there was still “substantial slack,” particularly in the job market. The U.S. unemployment rate is 8.3%, which is 2.5 percentage points above its average since the 1940s.

The Financial Times – Why the Fed has taken QE3 off the agenda
The minutes of the Federal Open Market Committee meeting on March 13 have surprised the markets. The committee seems to have shifted in a markedly more hawkish direction than was reflected in the statement issued after the meeting, and the bar to quantitative easing 3 now seems to be rather high. Perhaps we should have expected this, given the fact that speeches by chairman Ben Bernanke and Bill Dudley since the meeting had given no hint of any further easing. But the breadth of the committee’s shift away from easing was certainly not expected. It is easy to find hawkish phrases in the minutes. The US Federal Reserve staff has not only upgraded its real gross domestic product projections, and increased its inflation forecasts, but has also reduced its estimate of the output gap. Only “a couple” of FOMC members saw any case for further easing, and then only if growth falters or inflation falls below target. There was even some discussion of changing the guidance on keeping short rates “exceptionally low” up to the end of 2014, a move which would really shock markets. In an important speech last month, Mr Bernanke again concluded firmly that cyclical unemployment is far too high. But, significantly, he did not suggest that there was still a “very strong case” for “additional tools” to support the economy. He is probably biding his time, waiting for clearer evidence from the labour market that more action is needed. There are three areas of uncertainty in the labour market which the Fed will be watching carefully. – Fed Appears Less Keen On Further Easing: Minutes
Federal Reserve policymakers appear less keen to launch a fresh round of monetary stimulus as the U.S. economy improves, according to minutes for the central bank’s March meeting. The Fed policymakers noted recent signs of slightly stronger growth but remained cautious about a broad pick up in U.S. economic activity, focusing heavily on a still elevated jobless rate. However, the minutes suggest the appetite for another dose of quantitative easing, so-called QE3, has waned significantly.The March meeting minutes noted “a couple” of members thought additional stimulus might be needed if the economy loses momentum or inflation remains too low for too long.That contrasted with a much broader characterization in January, when the minutes cited a few members as seeing a possible need for additional easing before long, and others thinking stimulus might be required if economic conditions worsened.Still, the Fed remained sober about U.S. economic prospects.Members “generally agreed that the economic outlook, while a bit stronger overall, was broadly similar to that at the time of their January meeting,” the minutes said. – Fed Signals No Need for More Easing Unless Growth Falters
The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target. “A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC’s January meeting in which some Fed officials saw current conditions warranting additional action “before long.” The March minutes show decreased urgency to add stimulus with no sentiment expressed for additional easing without a deterioration in economic conditions. The central bank also affirmed its plan, first announced in January, to hold interest rates near zero through late 2014 as the economy’s improvement may not be sufficient to lower the outlook for coming years.


Yesterday the Federal Reserve released the minutes from the March 13, 2012 meeting. On page 7 of the linked PDF they said:

With longer-run inflation expectations still well anchored, most participants anticipated that after the temporary effect of the rise in oil and gasoline prices had run its course, inflation would be at or below the 2 percent rate that they judge most consistent with the Committee’s dual mandate. Indeed, a few participants were concerned that, with the persistence of considerable resource slack, inflation might be below the mandate-consistent rate for some time. Other participants, however, were worried that inflation pressures could increase as the expansion continued; these participants argued that, particularly in light of the recent rise in oil and gasoline prices, maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation.

So the Federal Reserve repeated what they said back in January. They believe that year-over-year PCE will decline in the next few years and come in below their 2% target. The Federal Reserve is basically telling us to ignore the actual data and forward projections by the markets (detailed yesterday) and go with the FOMC forecast.

This would be fine if the Federal Reserve provided good forecasts in the past, but given their recent track record on GDP, unemployment, inflation and on housing, we are wary.

Project Syndicate – Martin Feldstein: Fed Policy and Inflation Risk
During the past four years, the United States Federal Reserve has added enormous liquidity to the US commercial banking system, and thus to the American economy. Many observers worry that this liquidity will lead in the future to a rapid increase in the volume of bank credit, causing a brisk rise in the money supply – and of the subsequent rate of inflation. That risk is real, but it is not inevitable, because the relationship between the reserves held at the Fed and the subsequent stock of money and credit is no longer what it used to be. The explosion of reserves has not fueled inflation yet, and the large volume of reserves could in principle be reversed later. But reversing that liquidity may be politically difficult, as well as technically challenging. Anyone concerned about inflation has to focus on the volume of reserves being created by the Fed. Traditionally, the volume of bank deposits that constitute the broad money supply has increased in proportion to the amount of reserves that the commercial banks had available. Increases in the stock of money have generally led, over multiyear periods, to increases in the price level. Therefore, faster growth of reserves led to faster growth of the money supply – and on to a higher rate of inflation. The Fed in effect controlled – or sometimes failed to control – inflation by limiting the rate of growth of reserves. The Fed began an aggressive policy of quantitative easing in the summer of 2008 at the height of the economic and financial crisis. The total volume of reserves had remained virtually unchanged during the previous decade, varying between $40 billion and $50 billion. It then doubled between August and September of 2008, and exploded to more than $800 billion a year later. By June of 2011, the volume of reserves stood at $1.6 trillion, and has since remained at that level.

Source: Bianco Research

Category: Bailouts, Federal Reserve, Inflation, Think Tank

Is Deflation the Biggest Risk to the Economy?

Wall Street legend Robert Prechter argues the biggest risk to the economy is deflation, not inflation

- 4:23 -

Mar 22, 2012

Category: Inflation, Video

Bernanke, Inflation And Unemployment

Click to enlarge: ˜˜˜ – Bernanke Seen Accepting Faster Inflation Federal Reserve Chairman Ben S. Bernanke spent six years pushing for an inflation goal. Now that he has it, some investors are betting he’ll breach the 2 percent target in the short run to lower unemployment. The Fed chairman told lawmakers last week that…Read More

Category: Federal Reserve, Inflation, Markets, Think Tank

Do Rising Rents Complicate Inflation Assessment?

Do Rising Rents Complicate Inflation Assessment? Brent Meyer 02.23.12 ~~~ In the face of falling house prices, decreasing rates of homeownership, and a glut of vacant homes, the Consumer Price Index’s measure of the cost of owner-occupied housing—owners’ equivalent rent of residences (OER)—has begun to accelerate, rising at an annualized rate of 2.3 percent over…Read More

Category: Federal Reserve, Inflation, Real Estate, Think Tank

Major Secular Bear Markets (Inflaion Adjusted)

Yesterday we looked at 4 Major Secular Bear Markets. Several people asked for an inflation adjusted version. Thanks to Lance Roberts of Street Talk Advisors, you will find that below: > Real Price S&P 500 with Shiller’s Data and recessions click for larger chart

Category: Cycles, Inflation, Markets, Technical Analysis

Gary Shilling Says U.S. Faces Deflation


Gary Shilling Says U.S. Faces Deflation
Bloomberg, September 28, 2011

Category: Economy, Inflation, Video

What Does Inflation Say About Risk On/Off?

click for larger chart > Michael Gayed observes: “When the TIP/IEF price ratio (Inflation-Protection/Nominal-No-Inflation-Protection) trends higher, it means bond market is swinging towards increased inflation expectations. When the ratio is trending down, bond market is favoring deflation through outperformance of Nominal bonds. Inflation hedge tends to be equities: risk-on. Deflation hedge tends to be nominal…Read More

Category: Inflation, Quantitative, Trading

The Euro and You

Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.


Greece may seem a long way from Newport Beach, California. Well, it is. But, we live in the global village, or some other dim construction. In his June 16, 2011, edition of The Credit Strategist, Michael Lewitt explained “the interconnected nature of global financial markets render Europe’s problems the world’s problems…. [T]here is no longer any periphery.”

Lewitt also writes: “The list of interconnections goes on and on….[G]lobal regulators… have no real sense of what type of contagion effect would occur if Greece were to default. No doubt they believe it is significant enough that they are willing to do virtually anything humanly possible to prevent this scenario from unfolding.”

That is demonstrably correct. Since 2007, global bureaucrats have broken any law that has hindered their attempts to ward off our inevitable reckoning. Attempts to prevent a euro eruption have become preposterous. The European Central Bank (ECB) is clearly in extremis.

The interconnections that start with Greece and the ECB wind their way through the European, then U.S., banking systems, government bond yields, and the dollar. Extrapolating the script (“that they are willing to do virtually anything humanly possible…”), the ECB will print euros like never before (and never after, since its credibility will be nil.) Doing so, the ECB will enlighten the perplexed as to the central, financial tendency since 2007: the proportion of “money good” financial paper to the expanding universe of IOU’s is dwindling. As the percentage of worthy paper declines, the relative affection for government issues that would otherwise fail a screen test are, instead, improving. Specifically, the deluge of euros will, all else being equal (an escape clause of Greenspanian inspiration), drive U.S. Treasury yields down.

A week does not go by without the ECB reducing its standards of collateral. The cost is not only its credibility as a central bank (which, in any case, it is not) but in the composition of its deteriorating balance sheet.

To make matters worse, Greece is the smallest economy among the impoverished PIIGS: Portugal, Ireland, Italy, Greece, and Spain. Since others will probably follow Greece, the current impasse is all the more discouraging. The Greek government cannot meet its July interest payment obligations to banks, central and commercial. It can no longer borrow from banks or in the bond markets. (This is also true for Ireland and Portugal, and possibly others.) The Greek government has bills and salaries to pay. The ECB is doing its all to avoid default. This presents a dilemma: the further it goes in preventing (in fact: forestalling) a default by the Greek government, the more it compromises its legitimacy by breaking its own rules and ruining its balance sheet. A credit-sensitive bystander would say the ECB’s legitimacy and balance sheet are cases of the emperor wearing no clothes but conventional opinion being afraid to state the obvious.

Remembering that the euro is an experiment – a currency that is only 13-year-old and not issued by a sovereign government – the European Central Bank should, above all, adhere to the highest standards of integrity.

Read More

Category: Currency, Inflation, Think Tank

Manhattan Rentals (Inflation Adjusted)

Jonathan Miller of Matrix RE released a rental study of Manhattan real estate: Last week we released our rental study and the consensus was that the rental market was strong, better than the sales market (and expensive). So I thought I’d present the past 20 years and look at some of the peaks. When adjusted…Read More

Category: Digital Media, Inflation, Real Estate

Fade the Inflation Hysteria: Gipper Edition

As I believe there is a tremendous amount of revisionist history going on surrounding the Reagan era as it relates to economic and fiscal policy, I’ve begun to research available online archives, including the The American Presidency Project.  One never knows what one will find upon diving into a research project, but surprises are always…Read More

Category: Inflation, Taxes and Policy