As I have stated repeatedly, I do not buy this "One and Done" meme. This is the 3rd attempt at it — the first being last June, when Dallas Fed Chair Fisher issued his now infamous 8th inning comments. Then in January, the moonshot was once again launched on that idea.
The most recent rally started last week ont he Medley advisors claim that it was One and Done (although that was subsequently revised to "maybe 1 or 2").
I find all these Fed Kremlinologists at to be junk analysis at best. My preference is for data and quantitative analysis.
This chart suggest that in order for Fed Funds to revert to the mean, the Federal Reserve Board has a ways to go — both in rates and in time.
Note that we are now at 4.5%. Even if the Fed were to stand pat at 4.5%, the passage of time will move the 2000 – 2006 monthly median closer to the prior market periods median — each passing month raises the median.
UPDATE: March 21, 2006 5:07pm
CB raises the question — correctly — that equating average funds rate is not sound given the difference in inflation; Low now, 10% then.
My response is that I believe inflation is much higher than the present CPI reflects; The key change in CPI construction was the owners equivalent rent, which we addressed repeatedly here. Without the 1983 owners equivalent rent adjustment, the CPI would be
more like 5.3% — not the 10+% of the 1970s, but certainly not the 1-2%
its claimed to be at present.
Given the significance of housing to this economy — and with Housing Affordability Index at 14 year lows — its kinda silly to take CPI data seriously as a true measure of inflation.
UPDATE 2: March 22, 2006 6:07am
Rex Nutting makes an even better suggestion: Apply the same analysis using real versus nominal Fed rates.
I’m not a huge fan of Boskin, PCE, or even the CPI for that matter — I do not think they reflect inflation reality as experienced int he real world. But controlling for Real Fed Fund Rates (as opposed to nominal) may be more revealing than not controlling for inflation
The St.L Fed is such a pleasure to work with — they give you all the data formatted in Excel already! Its intriguing — let me see if I can find the Real Fed data in Excel (or pull it off of Bloomberg).
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