There Are No Hawks on the Fed, Only Ostriches

Mish

The Fed cannot spot inflation. Can you?

A Pink Elephant and the Fed

Bloomberg's Peter Coy @petercoy has an excellent article on Fed policy worth a good look: Don’t Think About Pink Elephants or Tighter Monetary Policy

There really aren’t any hawks left on the FOMC,” only doves of different degrees, JPMorgan Chase & Co. Chief U.S. Economist Michael Feroli wrote to clients on Jan. 14, referring to the Federal Reserve’s Federal Open Market Committee. “Monetary accommodation” today is “far greater” than in past decades when the unemployment rate was as low as it is now—6.7% in December—Jim Paulsen, chief investment strategist of the Leuthold Group, wrote Jan. 14.

A hawkish Fed would be jacking up interest rates right now. The Fed might say, as Paulsen writes in his note to investors, that the yield on 10-year Treasury notes is only one-seventh what it was in December 1986, when the unemployment rate was the same.

“Now is not the time to be talking about exit” from bond-buying, Powell said. When the time does come, he said, “We’ll let the world know.

Powell not only opposes raising rates or cutting bond purchases; he’s against scheduling it, talking about it, or even thinking about it too much. That may be sensible advice, but to people in the financial markets who are getting uneasy about inflation, his lack of concern could make them more concerned. Powell is like the psychologist who tells you not to think about pink elephants. From that moment on, some people can’t think about anything else.

Ostriches, Doves, or Monkeys?

The Fed is like a cross between the "See No Evil" monkey and an Ostrich With it's Head in a Hole. 

Ostriches don't really hide their heads in the sand, they bury eggs in the sand. 

In contrast, the Fed sticks it head in the sand, planting seeds of inflation and cheerfully hopes the seeds sprout. 

Meanwhile, like a pack monkeys wearing blinders, no one on the Fed can spot the inflation already present. 

Look Ma, No CPI

Consumer Price Index Components YOY 2020-12 Detail

The Fed's head-in-the-sand rationale is likely based on the CPI. 

I noted CPI Rose 0.4% in December with Gasoline the Major Factor.

The Fed ignores gasoline and food. I won't quibble with that. But I will more than quibble with other things.

What About Housing?

The BLS does not directly include home prices in the CPI. The latest Case-Shiller home price index is up 8.4% as of the latest report which is for October.

Instead of using home prices, the BLS uses Owners' Equivalent Rent (OER).

Ask anyone looking to buy a home what inflation looks like.

Failure to properly account for housing has distorted the CPI continually from 1998 until now.

The Fed did not spot the housing bubble nor predict the Great Recession because it did not understand the asset inflation housing bubble.

What About Health Care?

CPI Medical Cared Services Year-Over-Year 2020-12

The BLS says the cost of medical care is up 15% from a year ago.

Ask anyone buying their own health care how accurate that is. Also ask anyone buying their own health care if it is only 6.97% of their budget as the BLS states.

Capital Expenses

I get the fact that the Fed and BLS consider housing a capital expense. And I understand Medical expenses are mostly paid by businesses, Medicare, and Medicaid, not "consumers".

But what about those who do not have insurance. Do we ignore the rising costs and simply average them in?

What are we trying to measure? Or are we really trying to hide, not measure?

What About Bubbles?

The stock market and risk tolerances are also a measure of inflation albeit difficult to measure. 

Add it all up and the CPI is nothing but a "head in the sand" measure of purported inflation and a very poor one at that.

Not to worry, “We’ll let the world know,” when we spot inflation says Powell who cannot see the big pink elephant standing right on the Fed's table.

Mish

Comments (71)
No. 1-22
Carl_R
Carl_R

I occasionally check the Moore Inflation Predictor, which is a mechanical prediction model that takes into account known information for generate predictions of future inflation. The Moore model shows that when we get to March, we will start comparing to year earlier data where prices were skewed lower due to unusually low energy prices. The result is that they expect to see inflation reported at 3-5% for the rest of the year, starting in April.

Frilton Miedman
Frilton Miedman

My take...

Not going to get lost looking for the forest because the tree blocks my view.

We have a new Dem supermajority, outcries for a $15 fed min wage is prevalent.

Wage increases = inflation.

For the Fed, according to the Taylor rule, they'll be tightening in that case.

The fed, in my opinion, is at the extreme of a 40+ year trend of continually lowering rates, and very recently it's been a hot topic that they're "out of ammo".

Back in March I was rubbing my eyes in disbelief at treasuries and I'm not alone.

My gambit, March was the multi-decade extreme, we're now headed the other way.

I've deleveraged, my debt's all but gone, I'm saving/investing.

Sechel
Sechel

Well I"m convinced the Fed is being way to experimental and that interest rates are way too low. The Fed isn't trying to bail out the country , its trying to bail out the preident and the legislature who aren't doing their job. The Fed should say no. They have too many mandates. Growth, stable pricing, regulator, you name , climate. Not that thee aren't admirable goals, just that the Fed is not the appropriate mechanism

nzyank
nzyank

You've got to be kidding??? We are in the middle of a pandemic with high under and un employment. Last thing fed should be thinking about is inflation.

Also, $15 minimum wage will not have the negative impact people are so scared of, and will actually net positive economic effect. Many low end workers right now have no leverage over wages - they are just thankful to have a job. The increased income from a higher minimum wage will stimulate the economy more than any loss of jobs / businesses due to higher cost of business. Any inflationary impact will be one-off, and not ongoing.

Improving income inequality at the low end helps the overall economy, and reduces benefit payments. Increased education is not the cpmplete answer - there is much under-employment right now due to a lack of skilled work.

It is great Biden is putting a team in place that has the expertise and wisdom to address these issues in a positive manner.

Eddie_T
Eddie_T

How much of the Biden Plan is really the Yellen/Powell Plan?

I’d bet it’s a lot.

On hiding inflation....don’t you think that this under-measurement has some beginnings way back there.....when inflation was so high?...and the optics were so bad...that they learned then how to fudge the numbers to downplay inflation....which was on fire before Volcker administered the tough love that killed that beast.

It’s always politically advantageous to say inflation is low....whether it really is or not.

If it’s low....well then, it’s okay to do even more QE and print money....

So many disinflationary forces are just dumb luck too....gas got much cheaper because of fracking.

Goods got cheap because manufacturing was so much cheaper in China without pesky labor unions to interfere with corporate profits.

Food got cheaper because of GMO’s and factory farming.

Moore’s Law made computers get cheaper ad faster so fast that it made my head spin.

People can live with no insurance.....they just can’t ever achieve financial security, because a single hospitalization will wipe out a lifetime of savings.

People can live without buying a house.....they’re worse off, because they don’t have the inflation hedge. Owning your own home is probably a better inflation hedge than owning gold....in my opinion. It’s a tangible asset, and it’s tax advantaged.

Tengen
Tengen

Calculating inflation is a lot like calculating unemployment, just keep narrowing the band of allowable criteria until you reach a number low enough to be palatable to markets!

PecuniaNonOlet
PecuniaNonOlet

“Ostriches, Doves, or Monkeys?”

None of these animals spreads disease and destruction like the fed. Rats, roaches, or fungi would be more appropriate comparison.

Even better is Fed-covid, because like the virus, it replicates itself endlessly and offers nothing of value.

njbr
njbr

Speaking of ostriches and monkeys--

Trump's favorite pillow salesman (Mike Lindell) showed up at the WH to meet with Trump with a document that describes what needs to be done to overturn the election.

@MyPillowUSA
CEO Michael Lindell shows off his notes before going into the West Wing at the White House on Friday, Jan 15, 2021 in Washington, DC.
3:00 PM · Jan 15, 2021 from Washington,

ColoradoAccountant
ColoradoAccountant

The interest rate tells you how valuable the fiat currency is. Got gold?

Tedwardspharmd
Tedwardspharmd

Mish, of course the Fed sees the bubbles. The reality is this. The Fed will continue to buy, buy, buy. Anything less would require a complete dismantling of the system (banking, government spending, political) that they were set up to enable.

Realist
Realist

The current federal minimum wage of $7.25/hr was set in 2009.

I do not know Biden's exact proposal. Does anyone know whether he wants to raise it to $15 immediately, or is it phased in over time?

Even if the minimum wage is raised, I do not expect a big impact on inflation. Partly because only 20 million workers get paid minimum wage. Wages will continue to trail the inflation rate for the foreseeable future. Living standards will continue to decline because the US is uncompetitive in so many areas, wages cannot be easily raised.

Dodge Demon
Dodge Demon

Keynesian Klowns Abound!

Maximus_Minimus
Maximus_Minimus

I will take bets whether the fake inflation number is deliberate con or wilful ignorance. Chances are, these clowns truly believe their bullshit, and we are screwed more than we think.

oee
oee

there is no under measurement of CPI. there is something called the One Billion prices project run by MIT. you can overlay the CPI vs. the projects measured one billion prices and the two indices are consistent with each other.

Sandy Beach Dave
Sandy Beach Dave

What is inflation? It is an increase in the money supply. Debt increases money supply due to fractional reserve banking. Measuring price changes does not measure inflation as prices change due to supply and demand forces. Since the advent of the telephone, phone calls calls have come down in price because productivity increases made it cheaper to provide capacity and capacity increased faster than demand. That is one example showing that measuring prices does not measure inflation.

LOTRADER
LOTRADER

Why do people place their faith in bureaucrats to know what economic levers should be pulled to improve the economic state of every US Citizen? Why don't you let these same bureaucrats take responsibility for making all your family's financial investment decisions? Why you say....because you will be sleeping on a sidewalk soon after.

1Roseburgman
1Roseburgman

The prognosis is not good.

Democritus
Democritus

The FED not knowing what it's doing... That's an assumption.

Look, these guys are above average intelligent. They probably do not have many low/middle class people in their circle of friends and relatives... It seems more likely to me that they know exactly what they are doing, namely helping their tribe.

jack 100
jack 100

I actually minored in economics in college. Wage increases are a positive thing. MININUM WAGE has problems. 1) minimum wage was never meant to be a "livable wage". It was meant to introduce workers, mostly younger people to get their foot in the door of business. To learn how it operates. They would then be able to prosper in their minds, wills and emotions and all the while prosper in wealth and health.
2) When minimum more than doubles, the costs of everything: housing, utilities, food, clothing, cars, entertainment, will in fact go sky high. 3) those making a little over $15 per hour now, will not see their paychecks go up one penney from where it is right now. 4)They will in fact loose buying power. 5) The costs of raw materials will rise because of the cost of minimum wages going up. 6)Amazon delivery costs will rise for all the things people have shipped to their homes. 7)That $15 minimum increase will KEEP in all wage groups in slavery, and why? 8)Because all costs are not bourn on the backs of business, they are bourn on the backs of everyone living this utopian minimum wage, society is seeking. 9)They will not rise above the minimum wage mindset, no matter how high it goes. Minimum wage is still welfare mindset. That is their mindset.

jack 100
jack 100

Inflation does not create a influx of money. CHEAP money like we have now. Cheap money creates inflation, because the buying power is reduced. ECON 101. Debt does not increase money supply.

O2bgone
O2bgone

I remember the 1980s when the media was rightfully concentrated on taming inflation and how inflation was destroying the middle class. Now the media can’t wait for inflation. Perhaps this is so because journalists are too young to understand the concept of Pandora’s box. BTW, non-hedonic price inflation as has been historically measured in the US is running over 5% (as measured by the economist Walter Williams). Do we really want inflation to accelerate from here?


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