Fed Worried About Lack of Inflation, Stock Market Bubble (Sort Of)


FOMC minutes show Yellen is no longer convinced that low inflation is transitory. Other members mention bubble concerns.

Minutes of the FOMC Oct. 31-Nov. 1 meeting reflect concern inflation could stay below target longer than expected. The minutes also show a concern over bubbles.

Inflation or not, the Wall Street Journal reports Fed on Track for December Rate Rise, but Inflation Worries Persist.

Federal Reserve officials said at their latest meeting they likely would raise short-term interest rates “in the near term” because of a strengthening economy, although several said their support for the move would hinge on whether they see inflation picking up.

With three weeks to go until the Fed’s final scheduled gathering of 2017, the minutes of the Fed’s last meeting reinforced market expectations that a quarter-percentage-point rate increase is imminent. The market for federal-funds futures contracts, where traders bet on the path of interest rates, suggested a 100% probability of a rate increase at the Dec. 12-13 meeting, according to CME Group.

Yet minutes of the Oct. 31-Nov. 1 meeting, released Wednesday with the usual three-week lag, indicated that officials thought persistently weak inflation could stay below their 2% annual target for longer than many expected, raising questions about the pace of rate increases next year.

FOMC Minutes

Let's dive straight into the FOMC Minutes for more details (Emphasis mine).

Asset Valuation Discussion

The staff continued to judge that the overall vulnerabilities were moderate: Asset valuation pressures across markets were judged to have increased slightly, on balance, since the previous assessment in July and to have remained elevated; leverage in the nonfinancial sector stayed moderate; and, in the financial sector, leverage and vulnerabilities from maturity and liquidity transformation continued to be low.

In their comments regarding financial markets, participants generally judged that financial conditions remained accommodative despite the recent increases in the exchange value of the dollar and Treasury yields. In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy. It was noted, however, that elevated asset prices could be partly explained by a low neutral rate of interest. It was also observed that regulatory changes had contributed to an appreciable strengthening of capital and liquidity positions in the financial sector over recent years, increasing the resilience of the financial system to potential reversals in valuations.

The participants essentially mentioned the asset bubble concern, then brushed it aside. Here are a couple of pertinent Tweets.

Hussman Tweet on Imbalances

ZeroHedge Tweet on Leverage**

Following those well-stated points of view, let's return to the FOMC minutes for an absurd discussion of "inflation expectations".

FOMC Inflation Discussion

With core inflation readings continuing to surprise on the downside, however, many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected, and they discussed possible reasons for the recent shortfall.

Many participants observed that continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent. A number of these participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term.

In view of the persistent shortfall of inflation from the Committee's 2 percent objective and questions about whether longer-term inflation expectations were consistent with achievement of that objective, a couple of participants discussed the possibility that potential alternative frameworks for the conduct of monetary policy could be helpful in fulfilling the Committee's statutory mandate.

Inflation Expectation Ridiculousness

As I have pointed out on numerous occasions, inflation expectation concerns are absurd.

Q: If consumers think the price of food will drop, will they stop eating out?
Q: If consumers think the price of food will drop, will they stop eating at home?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes and stop cooking to wait for the event.
Q: If consumers think the price of gas will drop, will they stop driving or not fill up their car if it is running on empty?
Q: If consumers think the price of gas will rise, can they do anything about it other than fill up their tank more frequently?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of plane tickets, taxis, and bus tickets will drop, will they hold off taking the plane the train or the bus?
Q: If consumers think the price of plane tickets, taxis, and bus tickets will rise, will they rush out and buy multiple tickets driving the prices even higher up?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?

Those items constitute 80.254% of the CPI.

Stupidity Well Anchored

Yellen frequently comments that "Inflation expectations are well anchored".

The only thing that’s “well anchored” is the stupidity of the belief that inflation expectations generally matter.

In practice, the only time inflation expectations matter is when an economy is in or approaching hyperinflation. At such times, people will spend every cent on something the moment they can.

Asset Inflation Irony

In contrast to routine purchases of goods and services, people will rush to buy stocks in a bubble if they think prices will rise. They will hold off buying stocks if they expect prices will go down.

People will buy houses to rent or fix up if they think home prices will rise. They will hold off housing speculation if they expect prices will drop.

Bitcoin is another excellent example.

The very places where expectations do matter are the very things the Fed and mainstream media ignore.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.

  1. My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
  2. My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

For further discussion, please see Stupidity Well Anchored: Absurdity of Inflation Expectations in Graphic Form .

Mike "Mish" Shedlock

Comments (6)
No. 1-6

fed is simply another propaganda arm of DC ie it will never acknowledge inflation (ever),inflation hits double digits (triple)and the fed will only see sub 2%.GDP will never" print" negative again (ever)!Unemployment "rate"will never go up again (ever).Stock market can never be allowed to fall (ever).Ten years straight of "recovery"meanwhile the printing presses continue to run wide open buyin up virtually everything in sight,stocks,bonds,gold,oil,forex,and the relentless non stop mony printing will never end (until it does)


There is a point on many items where people are happy to wait out deflation in hopes of getting a better deal tomorrow than what they can get today. But basic staples like gasoline and heating fuel aren't one. If I know that there's a new chip in the pipeline that will be faster/better/cheaper I might wait to upgrade my PC another year. If I know that the premium features like automatic parking or smart cruise control available on today's high end cars will be available on midrange cars in a year or two I might just wait it out until then. But of course eating will still be necessary, as will health insurance, transportation and housing. So it is pretty easy to push inflation in those markets.


"FOMC minutes show Yellen is no longer convinced that low inflation is transitory." In a cycle, nothing ever stays the same. If Yellen waits long enough, she will get her wish for high inflation. Of coarse, in wishing for even 2% inflation, she is violating her mandate for stable prices.


For CPI prices to rise, which is what the insults to intellect and rational thought that spend their time cackling about things they don’t understand at the Fed, call “inflation”; supply of CPI goods must drop, or demand rise. The CPI consists almost exclusively of things that people, regardless of wealth, wish to consume a certain amount of, and then stop buying. Goods exhibiting a strongly diminishing utility return to consumed quantity, IOW.

Hence, goods that will, for any given aggregate societal wealth, see reduced aggregate demand as a function of increased wealth disparity. Simply because those on the losing side, will be forced to demand less; while those who benefit from the stratification, already have all the CPI goods they wish to consume, and will spend their additional wealth on other stuff: classed as “assets.” Hence magically not part of Harebrain O’Dumb’s calculation of “inflation.”

It therefore really shouldn’t take some rockstar logician, to figure out that Fed policies that shift the share of total wealth in the direction of those who already have plenty, by pumping up the prices of the “assets” the wealthy disproportionally own, isn’t going to increase CPI. But will depress it. While instead increasing the price of the things the wealthy do buy; namely “assets.” Duh!

Which leaves the only mean left by which the Fed’s “tools” can engender CPI inflation, is by way of reducing supply. Even faster than they reduce CPI demand. IOW, by artificially inducing scarcity. Which is always the inevitable endgame in these kinds of “print our way to ‘wealth’ ” scams. As is currently on proud display, for anyone half sentient to observe, in Venezuela.

The way that process works, is that ever more aggressive pumping of asset prices, changes the composition of remuneration: From those who can, and do, efficiently produce goods and services people demand (i.e. payment for actively producing a demanded good or service), to those who arbitrarily happen to “own” “assets.” (i.e. idly sitting around “owning” something”) And as a secondary effect, also to those who take cuts from transfers of said “assets.” Which leads to

1) Fewer people being interested in doing anything productive, preferring instead to focus on the much more lucrative racket of weaseling themselves into “owning” some “asset,” or positioning themselves to make a buck from transferring them / trading in them.

2) As aggregate asset value become a larger share/multiple of aggregate productive output; those who own them gain relative political influence (political influence is a perfectly normal economic good, spend more get more, no matter what dumb progressives chanting “democracy!!” and “things are different this time” have been told to uncritically regurgitate.) And it is in the interest of current asset owners to ban anything that could lower the prices of their assets. Which includes competition by more efficient upstarts. So, you end up with regulations, bans, licensing schemes, zoning laws and ever more stifling IP law interpretations. All of which slows down/reduces growth in productive output.

3) Many asset prices figure heavily on the “cost” side of productive enterprise. Land and office/factory space being the most obvious. IP and increased cost of necessary “licensed professionals” being others. So, to keep the already wealthy and connected flush in their idleness and/or legally guaranteed privilege, costs are driven up for everyone who wants to produce something.

4) Combine the above increased cost and difficulty of doing anything productive, with the increased share of wealth owned by idle asset owners, and you end up with fewer and fewer people doing productive work. And more and more of them instead serving as simple hand servants to the idle rich. You get maids, nannies, personal trainers, personal shoppers, chauffeurs, private jet pilots, tennis and golf pros, luxury goods clerks, masseuses, mistresses, prostitutes plastic surgeons, “life coaches,” dog walkers, SAT test coaches, bodyguards and personal assistants. Instead of factory workers, engineers, builders and doctors focused on curing/alleviating illnesses common to all.

I’m sure I’m missing other factors, but just the above 4 are more than enough to, over time, kill of productive activity to the degree where at some point, the Fed will indeed succeed in seeing “inflation,” or CPI prices, rising. Simply because there will not be enough productive capacity left, to produce enough CPI goods to satisfy even the hugely depressed demand resulting from the Fed’s own actions. Again, just as is currently on display in Venezuela.


Wow. Even the FED can see what everybody else already knew.


The Fed is an officially sanctioned priesthood, that practises rituals and proclaims incantations -- the illusion of control and understanding of forces of which they in reality haven't a clue.

Global Economics