Yves here. Fedwatching has become more important than ever, with markets driven by aggressive central bank intervention, yet also often tedious, as the Fed has painted itself in a corner.
However, make no mistake that the Fed is eager to raise rates, or as the members of the Board of Governors and regional Fed presidents like to put it, to “normalize” policy. I was on an e-mail thread yesterday that included economists and financial writers who have a following. Some representative comments:
They want to hike but they can’t yet. I feel they believe they have conditioned the market enough to expect a hike when the data turn. So what is missing is better data. One quarter of 2% growth and PCE inflation at say 1% and they will pull the trigger. That’s what Yellen basically said today.
If they could hike without moving the stock market, or the dollar, sure, agreed without question. But I would be astonished if the regional presidents weren’t being inundated with complaints by big company CEOs about the dollar’s strength over the last two quarters, when S&P earnings, incidentally, were down 14% and 13% YOY, with the dollar certainly no small culprit in that. And the stock market is critical for them–isn’t that what the whole financial stability concern is about?– so unless they could create a groundswell of jawboning about how the economy’s strong enough, and the market cheap enough, to handle a rate hike and see it as a sign of economic strength, I don’t think they can chance even the smallest of drops. There must be people at the Fed who understand that the market structure is so fragile that a 4 or 5 percent drop could really snowball out of control, and though there’s been no wealth effect to speak of to the upside, and falling market would almost certainly produce a negative wealth effect, and have large negative psychological implications for the economy. Finally, given that confidence in the Fed is paramount in the pursuit of all its objectives, I think they fear having to turn around and take back the hike almost immediately, or rather fear what that might mean for perceptions of the Fed’s command and control capabilities. I do think they hate the thought of hitting the seventh anniversary of 0% interest rates, which I believe gets celebrated in December, so yes, they’d love to avoid that. But I think they’re scared to death, and not without reason.
In my conspiratorial mind, a rate hike — sooner rather than later — makes perfect sense. The slowdown/recession will coincide with tightening, thereby preserving the image of the Fed as the almighty driver of economic well being….I say they want to hike, but the data isn’t cooperating. I also say that they COULD make the case that people are underestimating the risk(s) of waiting. That, in spite of the data, things are, in fact, better than they appear to be and the Fed is now concerned enough about upside risks to justify a(n albeit unwarranted) hike. They can easily make a preemptive argument. I’m not saying they WILL, I’m just saying that I can imagine a scenario where this serves a dual purpose. They get what they so desperately want — “normalization” — and they provide cover against the growing body of evidence that monetary policy isn’t all that (even absent the ZLB). As growth slows/reverses, they actually get to take some credit for it. #HackLivesMatter #FedRelevance #ViveLaFOMC!
Mind you, this is not a beat I follow closely, but having seen regional Fed presidents pumping for “normalization,” my guess is that the the central bank will the first set of solid looking data, and that could be as little as two successive months, to start increasing rates. Remember, the Fed also has a bias to interpret data as proving that its policies have been working….and I don’t mean just for the banks. And the the Fed sees strengthening core inflation as a proof of success
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
Inflation has not been a problem recently, according to the Consumer Price Index. Energy prices have plunged, which helped, and the rising costs of housing, which account for over one-third of the index, are purposefully mitigated via some elegant statistical twists, and that helped a lot.
Everyone has been lulled to sleep by the sheer absence of consumer price inflation. And the Fed has used this low inflation as pretext to keep its foot all the way on the accelerator of total interest-rate repression, though it isn’t accelerating much of anything other than asset price inflation.
But that was then, and this is now.
The headline CPI still looks benign, inching up 0.1% in April on a seasonally adjusted basis, the Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index declined 0.2% before seasonal adjustment, thanks to the energy index, which plunged 19.4%.
But the core CPI (less food and energy) rose 0.3% in April, its largest increase since January 2013. Some of the standouts:
Shelter +0.3%; rent, owners’ equivalent rent, and lodging away from home +0.3%; medical care +0.7%, its largest increase since January 2007; medical care services +0.9%, hospital services +1.9%; household furnishings and operations +0.5%, its largest increase since September 2008; used cars and trucks +0.6%; new vehicles +0.1 percent.
Heat is building up beneath the overall index.
To shed more light on this phenomenon, the Atlanta Fed releases a “sticky-price consumer price index,” the “Sticky CPI,” which consists of a weighted basket of items that change price relatively slowly. And in April, annualized, it soared 3.50%, the sharpest increase since July 2008! “Core Sticky CPI ex-shelter” soared 3.83%, the highest since August 2008.
This puts the Sticky CPI at 2.1% above where it was a year ago, even though the overall headline CPI, thanks to the plunge in energy, actually declined over the same period. The Sticky CPI is not supposed to jump like this; it consists of items that change price “relatively slowly,” as the Atlanta Fed describes it. Now they’re in lift-off mode.
This chart, going back to January 2009 shows the sudden spike of inflation, as expressed by the Sticky CPI:
Fed Chair Janet Yellen said today that “it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy.” To support this sort of revolutionary activity, she would have to be “reasonably confident that inflation” – for her, that’s the PCE index – “will move back to 2% over the medium term.”
Energy is not going to decline much further from where it was in April. Other prices are rising and some are soaring. What gives?
This puts the Fed way behind the curve – as many experts have long predicted. So here is former Fed Governor Lawrence Lindsey, who was right before in a big way and got fired for it. He said that the Fed has “almost no credibility” with his clients about “staying on top of ticking monetary bomb.” Read… Former Fed Governor Predicts “Wrenching” Market Adjustment