“If I had a hammer” & “When will they ever learn”

From the FOMC Minutes

Most participants continued to expect that, with labor markets continuing to strengthen, the dollar no longer appreciating, and energy prices apparently having bottomed out, inflation would move up to the Committee’s 2 percent objective in the medium run.

Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.

Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments.

They want markets to play Keynes´ “Beauty Contest Game”. However, market participants look at the same data that the Fed does. And markets don´t see objective reasons for the Fed to (explicitly) tighten.

The dollar, which reversed trend shortly after the April meeting, rose and will continue to rise to reflect the renewed passive tightening! When will they ever learn?

The Fed creates the “Ugly Duckling”

Ugly Duckling_1

Tim Worstall writes:

The reason this time is different is because, well, this time is different.

Let´s be more precise. The reason this “time is different” is because monetary policy has acted very differently, compressing spending growth thus, turning the 2007 cycle into the “Ugly Duckling”!

Ugly Duckling_2

PS BTW, The Atlanta Fed GDPNow nailed it. The average of it´s 13 successive Q1 RGDP forecasts (annualized) was 0.58%!

Must be lively in the FOMC these days

A James Alexander post

As expected the FOMC made no change to its target rate. But we still think that the discussions at the FOMC are much more lively than they have been. Somehow, the “normalization” program pressed by the Fedborg and championed by the anti-prosperity inflation hawks has been delayed. Hooray!

We reckon that some of the newbies on the FOMC, particularly Neel Kashkari are shaking things up a bit. In an internal interview released the other day he made the refreshingly honest statement:

“Clearly what happens in global financial markets, as an example, will affect the U.S. economy. We can’t be blind to the fact that actions we take could affect global economic developments, which in turn will have an effect on our economy. We need to think about those feedback loops, and I believe that we do. It is one of the many inputs that we look at as we decide the optimum course of monetary policy.”

It is such a change from the stance of the Fed until recently that believes it operates somehow independently of the real world rather than a participant. Sure in the long run money is neutral, but in the short run, in fact for the last eight years, it has not been neutral. Monetary policy was way too tight in 2008 and thus caused the recession. And policy has continued way too tight so that the US has had a very prolonged recovery from that recession. And may now be so tight again as to cause a new recession.

Obsession with keeping projected inflation below 2% means a sword of damocles of potential monetary tightening has consistently hung over the market and made economic growth like pushing water uphill. And since mid-2014 the US has had passive tightening, and after December 2015 actual tightening.

The Fedborg is not responding well to the uppity newbies on the FOMC. It is spitting out bizarre statements like today’s “Labor market conditions have improved further …” when it’s own Changes in Labour Market Conditions Index clearly shows them worsening.

It tries to highlight  that although nominal wage growth has cooled, real wages are much better.

“Growth in household spending has moderated, although households’ real income has risen at a solid rate”

Hasn’t it heard of the sticky wages problem? We had always thought that this key insight, perhaps the only insight, macroeconomics has had is rather a problem. Naively pointing to real wage growth in a deflation has long been regarded as a basic error – one which would lose a lot of marks if spotted in any undergraduate economics essay.

The Fedborg wants rates up because it believes rates are the tool for the implementation of monetary policy. Market Monetarists, like the market itself, believe expectations about future policy are the tool. The Fedborg doesn’t like expectations as it thinks they are harder to control, based on market consensus rather than a hard price like the Fed Funds Target Rate. Consensus is dangerously democratic or even anarchistic in that it may be different from the Fedborg’s own, autocratic, view of the world.

At least today the Fedborg has been shut up. We fear it won’t remain quiet forever and that any sustained market momentum will put it back on top. Hopefully, Kashkari and others might realise that this is also a feedback loop:

[market-strengthening -> Fed tightening talk -> market weakening -> Fed backing off -> market strengthening -> Fed tightening talk -> … ]

And a loop that needs breaking in order to achieve sustainable and stable growth – by a shift away from inflation targeting and towards nominal income growth targeting.

FOMC splits, and it is a good thing!

A James Alexander post

It had already been argued here last month that the FOMC looked like it was splitting judged by the January 2016 Minutes. We said that this was a good idea given the hopeless leadership from the Yellen/Fischer axis.

It has also been looking like William Dudley, newly reappointed as governor of the NY Fed, has been expressing the market views even more clearly. Letting markets set monetary policy is a good thing, the sum of all views and not just those of a few people sitting on a committee.

Well, it looks like the split has come to pass. The newswires were hot when Brainard gave a clearly dovish speech earlier this month the very same day as uber-hawk Fischer tried to claim that inflation was about to accelerate out of controlfour more hikes .

With hindsight, the particularly old school speech Fischer gave to the NABE looks to have been even more of a retirement speech than it read at the time. His disastrous “four more hikes” interview in early January has damaged his credibility beyond repair, his retirement cannot come too soon.

As we argued in February, especially after looking into Brainard’s biography she is a deeply political figure, very close to the Clintons. If Hilary is to win the election only a fool or an inflation hawk (they are often the same) would think that tightening monetary policy is a good thing. Just to be clear, Market Monetarists are hawks too, whenever nominal growth is persistently above trend.

If we are right and politics has split the FOMC then we are in for a really good spell of dovish monetary policy out of the Fed. Yellen’s comments today show either someone confused, covering up a split or secretly supportive of the splitters – and against the Fedborg and their “normalisation” mania (remember that).

She said nothing much had changed on fundamentals but the FOMC wanted to be more accommodative.

She said that the FOMC had declined to declare where the bias on risk was because some thought them balanced but some thought them to the downside (ie the splitters) – “there is no collective judgement in this statement … we declined to make a collective statement”.

She said that the things pushing up core CPI were volatile – but the normal view is that core excludes volatile items.

Who cares for now. Looser monetary policy in an environment of weakening NGDP growth has to be a good thing.

The splitters need to build on their success by shifting focus to NGDP Growth targets and away from targeting, unmeasurable, inflation.

Is the FOMC about to split? Sooner the better

A James Alexander post

If it’s possible for the Supreme Court to become supremely politicized, why not the FOMC too? No area of US government is free of it.

In an election year it seems odd that the FOMC should be taking such huge risks with the economy by actively tightening monetary policy. NGDP growth is slowing horribly, and expectations have fallen too – judging by equity markets, bond yields, TIPs yields and the US dollar. The Non-Manufacturing ISM, 80% of the economy was weak, joining the already weak industrial sector.

Of course it’s even odder that the Chair is an avowed Democrat, but Yellen has long since gone native, just like Bernanke, forgetting all their pro-growth dovish bias in favor of the instinctive anti-inflation hawkishness of the Fedborg.

However, there is hope for an optimist like me. The recent minutes of the FOMC’s January meeting contained this snippet:

a few participants noted that direct evidence that inflation was rising toward 2 percent would be an important element of their assessment of the outlook and of the appropriate path for policy.

Apparently these were voting members putting down a strong market. This looks like a growing revolt of the doves.

The doves will have had their numbers and morale swelled by the arrival of Neel Kashkari. He seems a very lively  and worthy successor to Kocherlakota. He’s also young but battle hardened in actual, real, electoral politics. He doesn’t sound at all like his ultimate ambition is to be absorbed by the Fedborg into grey’dom and inflation doom-mongering. He seems in a hurry to make his mark. Officially, he’s a Republican, but doesn’t sound like the usual right wing inflation nutcase.

Doves will also have been boosted by the exit of the always-wrong Richard Fisher as his replacement seems much more balanced, and Texas needs a boost now, anyway.

The rest of the minutes was the usual dreary on the one hand this, on the other that. The epitome of the Fedborg, it’s “Policy Normalization” program only gets two mentions, thankfully.

It would all be funny,if it weren’t so tragic.The fact that the Fed can’t look in the mirror and see that its constant reiteration of being “data dependent”, is  just a constant feedback loop. They just can’t see that they cause the data to move, thinking it somehow has nothing to do with them (i.e. exogenous).

Not even someone as smart as Tim Duy can see the irony of what he correctly identifies as what is going on:

The Fed will take a pause on rate hikes. An indefinite pause. The sooner they admit this, the better off we will all be. Indeed, the sooner they admit this, the sooner financial markets will calm and the the sooner they would be able to resume hiking rates. 

What? Resume hiking rates? How stupid does he think the market is? Well, maybe it was duped once, but surely not twice.

That is why it is so hard to predict a recession, because it is so hard to predict when the madmen who are in a constant feedback loop will realize they are in it and change their behavior.

“Entre les deux, mon coeur balance”

This is the imaginary scale that hangs over the center of the FOMC´s meeting table.

Entre les deux

Unemployment and inflation are the two objects on the scale. The Fed wants to keep the scale “balanced”. For that purpose, it has a policy framework best described as “gradual normalization”.

As Janet Yellen said last September, telegraphing a rate increase in the near future:

“But we are getting closer. The labor market has improved. And as I’ve said in the past we don’t want to wait until we’ve fully met both of our objectives to begin the process of tightening policy given the lags in the operation of monetary policy.”

In other words, it wants to be able to “normalize gradually”. The “link” between the two plates of the scale is the Phillips Curve/NAIRU subscribed by several FOMC members, according to which, “too little” rate of unemployment will shift the inflation plate up, maybe abruptly, forcing the FOMC to abandon the “gradual” half of the framework!

But there are tensions. According to this Binyamin Appelbaum piece in the NYT:

One wing of the Fed sees an undiminished case for raising rates.

Esther L. George, president of the Federal Reserve Bank of Kansas City and one of the 10 Fed officials voting on the direction of policy this year, said this week that the Fed “should continue the gradual adjustment of moving rates higher to keep them aligned with economic activity and inflation.”

She also played down concerns about the economic impact of recent market volatility. “While taking a signal from such volatility is warranted,” she said, “monetary policy cannot respond to every blip in financial markets.”

Loretta J. Mester, president of the Federal Reserve Bank of Cleveland and another voter, said on Thursday in New York that it was “premature” to change her economic outlook.

“At this point, solid labor market indicators, including strong payroll growth, and healthy growth in real disposable income, suggest that underlying U.S. economic fundamentals remain sound,” Ms. Mester said. “Until we see further evidence to the contrary, my expectation is that the U.S. economy will work through the latest episode of market turbulence and soft patch to regain its footing for moderate growth.”

Other Fed officials, however, say the volatility has given them pause.

William C. Dudley, president of the Federal Reserve Bank of New York and a close adviser to Ms. Yellen, said in an interview with Market News International this week that he was worried about the economic impact of jittery markets.

“If those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision,” Mr. Dudley said.

And Lael Brainard, a Fed governor who has been particularly outspoken in warning that global pressures will weigh on domestic growth, told The Wall Street Journal this week that “recent developments reinforce the case for watchful waiting.”

Investors, oddly, have walked away from this debate feeling confident that the Fed will not raise rates in March. Indeed, asset prices tied to expectations about the future level of short-term interest imply only about a 50 percent chance of any rate increase this year.

That contrasts sharply with the Fed’s own prediction in December that it planned to raise rates by about one percentage point in 2016, most likely in four discrete steps.

Many analysts have taken a more measured position, predicting that the Fed is less likely to move in March, but that it will still raise rates two or three times this year.

Michael Gapen, chief United States economist at Barclays, said on Friday he now expected the Fed to raise rates twice, instead of three times, and to start in June, instead of March.

Michael Feroli, chief United States economist at JPMorgan Chase, said the continuation of low inflation probably meant Fed policy makers would hesitate at their next session.

“Were the meeting held tomorrow, we still think the Fed would stay on hold — primarily because of concerns about inflation and inflation expectations,” he said. “But it would be an uncomfortable hold.

Uncomfortable, indeed! But that has to do with the policy framework adopted.

The Fed is more like the ECB 2011 than Fed 1937

A James Alexander post

Ja-net Yel-len, Ja-net Yel-len, are you Tri-chet in dis-guise?

At football matches in England there is always a particularly hurtful chant that goes up around the ground when a team, a player or a referee is doing badly. They are very often compared to some team or referee or player whom everyone knows is far worse. It is sung to the tune of a famous hymn, like many football songs, “Guide me, O thou great redeemer”. Janet Yellen’s record so far as Chairman of the Fed reminds of this chant, and particularly Jean-Claude Trichet’s penultimate year (mis)guiding the ECB.

13th July 2011 should go down as a day of infamy in the Euro Area. It was date of the second rate rise by the ECB that year, that tanked markets and led more or less directly to a dramatic liquidity squeeze for Euro Area banks, and caused the plunge into the second part of the Area’s double dip recession.

JA EZ-US NGDP4

We all now know that Euro Area troubles started in 2008 when the world was plunged into the Great Recession by pro-cyclical monetary tightening by various central banks, just as NGDP growth expectations were falling rapidly at the time of the Lehman default. A lot of other stuff was going on, for sure, but it was noise compared to the core monetary story.

The US and Europe had already spent two hard years escaping from the consequences of the 2008 tightening. Then, in an attempt to out-macho the US and impress the selfish German establishment, the ECB under Trichet decided to stamp on headline inflation hitting nearly 3% in early 2011, while core remained solidly below 2%. The ECB therefore directly smashed the early stages of recovery with a heavy tightening bias and two rate rises. The different paths of the two big currency blocs has been very well documented here with a good summary here.

Trichet and those two ECB 2011 rate rises

The first of the rate rises that year on 3th April 2011 did not cause undue damage. 1Q11 Euro Area NGDP had almost hit the dizzying 3.9% YoY. Within the Area German NGDP was at 6.4% YoY that quarter. This was too strong for Germany and so they pressed for a tightening and Trichet was only too happy to oblige, forgetting about the rest of the Euro Area, especially the periphery. In that quarter Spain and Portugal were already enduring marginally negative NGDP growth. Yes, they were in outright deflation but had their monetary policy tightened substantially – it seems really crazy the more you think about it. Greece had very negative NGDP YoY at -9%.

Never mind, the selfish, almost anti-European, old DM/German bloc anti-growth bias had to be appeased. Actually, it was even worse, Trichet was actually rather fanatical in thinking he was doing the right thing for the Euro Area as a whole. It was his final goodbye press conference that made me rethink my priors. He was forced to defend what havoc he’d caused by trying to claim credit for giving the Euro Area a lower inflation rate than Germany had experienced prior to the Euro – and hang the consequences of a double dip recession. It was all deeply personal and subjective. Central bankers can do no wrong and certainly cannot take criticism.

Well, the rest is history. The Euro Area slowed during 2Q11, as you’d expect from such a tightening of monetary policy. Although the Euro Area stock markets merely drifted, NGDP growth fell to 2.9%. The stock market drift may have lulled Trichet and his ECB into a false sense of confidence.

As expectations for NGDP growth dropped further, they made their second fateful move. Stocks tanked within days, the banking crisis re-erupted, engulfing the French bank SocGen in particular. NGDP fell to 2.4% during 3Q and carried out on down. It was too late, the damage had been done and the cycle was hard to turn.

Market response to April 2011 ECB rate similar to December 2015 Fed rise

We often see articles and blogs wondering whether the US rate rise in late 2015 will end up forcing the country to re-live the great 1937 stumble in the recovery from the Great Depression when monetary policy was tightened too early. The Euro Area from 2011 seems far more apt, and fresh in our memories. A slow recovery, with a few hot spots, was stamped on by two rate rises amidst a severe tightening bias. Rates ended up falling, of course. The first rate rise was seen by the markets as almost manageable, or rather it was met with a degree of sang froid. The second seemed mad given where NGDP expectations had tumbled.

The December 2015 rate rise seemed to be met with a similar sang froid, after all it had been expected for months. Some, particularly market Monetarists, had warned of the dangers of the monetary tightening and thought actual and expected NGDP growth too weak to cope. The market sang froid was probably mistaken by the Fed as an acceptance that its full-blown “normalisation” programme could proceed as they planned. Vice-Chairman Stanley Fischer’s now notorious 6th January interview on CNBC, especially his articulation that four more rate rises this year was “in the ballpark”.

Economic news has been poor since then, reflecting the impact of the 2015 monetary tightening, and now expectations are falling. The question remains: Is Janet Yellen Jean-Claude Trichet in disguise? Will she take some market tranquillity as a justification for a second rate rise? Maybe. Just how much does she fear inflation rising to the Fed’s forecast of 2%, how stubborn will she be in pursuing her “normalisation” programme come what may?

“You don’t know what you’re doing”

When the team, referee or player continue to invite really bad comparisons the football fans often switch to an even more hurtful chant, “you don’t know what you’re doing, you don’t know what you’re doing”. It is sung to the tune of “Que sera, sera” (whatever will be, will be). Fatalistic, but apt.

Dudley is the markets man on the FOMC, a small mercy

A James Alexander post

The role of the President of the NY Fed is to be the lightning conductor of market sentiment to the FOMC. The NY Fed is the operating arm of the FOMC, conducting the open market operations. Because of this importance the President of the NY Fed gets a permanent vote at the FOMC, alongside the senior Fed staffers like Yellen and Fischer. What the NY Fed President says is important, often more so than the Vice-Chairman of the Fed, currently Fischer, or sometimes even than the Fed Governor themselves.

While Dudley has always physically looked uncomfortable passively tightening monetary policy and also actively doing so, he is incredibly loyal too. Twenty years at Goldman Sachs would have taught him that. He said nothing in public or officially dissented to any of the moves. Today we get this:

In addition, the weakening outlook for the global economy and any further strengthening of the dollar could have “significant consequences” for the health of the U.S. economy, William Dudley, president of the Federal Reserve Bank of New York, told MNSI in an interview.

“One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting,” said Dudley, a permanent voter on the Federal Open Market Committee, the Fed’s monetary policy arm.

“So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision,” he said.

But how can he and his colleagues be so obtuse as to think that the tighter financial conditions are not a direct response to their own active tightening of monetary policy? It is this obtuseness, this stubbornness, that is of major concern, and makes monetary policy so unpredictable at times. Humans make errors

Predicting when the humans will recognise their errors, if ever, is all too subjective. When will the FOMC reverse course: the S&P hits 1500, unemployment at 8%, an inverted yield curve? All of them? We know they will change their minds, the question is whether market players can stay solvent until they do.

Where does monetary policy enter the Fed´s equation?

To them, inflation, or its absence, is purely a cost phenomenon, pushed up or down by oil prices and/or the dollar and unemployment! Worse, they insist on reasoning from a price change! From the statement:

Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.

That “sing-a-long” has been going on for such a long time that “medium-term” has turned into “long-term” many moons ago!

I reproduce a set of charts that indicate the tightening of monetary policy (gauged by the falling trend in NGDP growth since mid-2014) is bringing the economy closer and closer to a recession (maybe in several quarters down the road the NBER will say that it began in early 2016!)

FOMC 270116_1

FOMC 270116_2

After leaving the Fed, Kocherlakota has been very “vocal”. From a post today:

Monetary Policy is Not About Interest Rates

The Federal Open Market Committee has a problem.  The problem is not that it raised rates by a scant quarter percentage point in December.   The problem is the overall policy framework that led the Committee to take that action.  The Committee needs to switch to a framework that is less focused on a particular time path of interest rates, and more focused on the achievement of its goals.    

The FOMC’s current policy framework goes back to at least mid-2013.   It can be defined by two key words gradual and normalization.  Both words refer to the level of monetary accommodation.  In terms of the target range for the fed funds rate, the word “gradual” is generally interpreted by those who watch the Fed closely to mean about four increases of a quarter percentage point.   The word “normalization” is generally interpreted to mean “returning to about 3.5 percent”.

Lars Christensen has evoked the same principal:

Frankly speaking I don’t feel like commenting much on the FOMC’s decision today to keep the Fed fund target unchanged – it was as expected, but sadly it is very clear that the Fed has not given up the 1970s style focus on the Phillips curve and on the US labour market rather than focusing on monetary and market indicators. That is just plain depressing.

Anyway, I would rather focus on the policy framework rather than on today’s decision because at the core of why the Fed consistently seems to fail on monetary policy is the weaknesses in the monetary policy framework.

The FOMC is an Executive Committee that thinks it´s over and above criticism. It can never do wrong! But they also say that “we´re not responsible”. In fact, they sell themselves as having “The Courage to Act”!

The Fed must be happy. The employment numbers “confirm their view”!

From the WSJ “Economists react”:

“For the [Federal Open Market Committee], the unexpected 292,000 jobs added in December, and the upward revisions to October and November, will bolster their case for four rate hikes this year. Markets are desperate for good news, and now have it, but it comes with a caveat because better employment growth means the Fed will raise rates faster.” —Beth Ann Bovino, Standard & Poor’s Ratings Services

From Bill Gross:

The Fed does believe that jobs and the unemployment rate is critical to future inflation over the medium term,” Gross said. “So the three or four Fed steps that Stan Fischer and Janet Yellen seem to confirm are probably on track, at least in their verbiage.”

They are right. That´s the way the Fed thinks. But it is dangerous and wrong! Insisting on the mistake will likely lead to another recession. Larry Kudlow (HT Lars Christensen) also rants on the Fed´s mistaken view.

Fed should not make policy based on labor: Kudlow

Some illustrations for the past 22 years will help identify the mistake.

The first chart shows no connection between unemployment and inflation. While unemployment has “travelled widely”, core inflation has remained low and stable (on average below the 2% target)

Fed Happy_1

Note how inflation and unemployment reacted to the productivity shock of the late 1990s. Note also how the negative AD shock of 2008 affected unemployment and inflation.

Many at the FOMC like to appeal to “special causes” for the low inflation. A favorite is oil prices. However, the next chart shows that while oil prices have “jumped & tumbled”, core inflation has remained subdued.

Fed Happy_2

Note that in 2007-08 the economy was buffeted by both a negative AD shock and a negative supply (oil) shock. In that case both the AD curve and AS curve shift to the left. This solves the “puzzle” frequently mentioned of “why didn´t inflation fall even more”. The negative AS shock “supported” inflation. However, the negative AD shock was so strong that it ended up “annulling” the supply shock, with oil prices tumbling, at which point inflation dropped.

And Lacker is worried about an “inflation conundrum” (title has changed)!

Now, let´s look at things from a NGDP perspective.

Fed Happy_3

Much better, I think. The productivity shock after 1997 reduced unemployment and inflation. Keeping monetary policy (NGDP growth) steady was key to the outcome. However, in 1999/00, NGDP growth was a bit excessive and the reaction resulted in too much tightening. In 2003-05, the mistake was corrected, with unemployment falling and inflation remaining close to target.

Bernanke reacts to the oil shock by tightening monetary policy (allowing NGDP growth to fall unadvisedly (“let´s ball drop”). The mistake was compounded by “losing the ball”, after which the “net was permanently lowered” i.e. NGDP growth never rose sufficiently to take spending to the previous trend level.

Additional information is provided by the NGDP growth, RGDP growth and oil prices:

Fed Happy_4

During the first leg of the oil shock in 2002-05, monetary policy was “expansionary”, to offset the previous “tightening”. Note from the second chart from the top, that inflation remained well behaved. Despite the oil shock, real output growth rebounded. Bernanke “dropping the ball”, combined with the second leg of the oil shock, strongly decreased real growth. When the “ball was lost”, real growth tanked. The price of oil tumbled as a result of the strongly negative AD shock.

The oil shock effect on output was something about which Bernanke had written in 1997, concluding:

Substantively, our results support that an important part of the effect of oil price shocks on the economy results not from the change in oil price per se, but from the resulting tightening of monetary policy.

This finding may help explain the apparently large effects of oil price changes found by Hamilton (1983) and many others.

He certainly proved his point in 2007-08!

What the above discussions tells me is that monetary policy should not be informed by the rate of unemployment, what´s happening to oil prices or whatnot. A focus on NGDP growth relative to a “desired trend path” is all that´s needed.

The Fed seems to be making the same error again, this time by focusing on unemployment instead of oil prices.

Ever since the NGDP growth “net” was brought (insufficiently) up in 2010 and until mid-2014, trend NGDP growth was close to 4%. Since then, it has trended down dangerously:

Fed Happy_5

So it´s not at all surprising to see real and financial indicators also going south. Just to give two examples; the Institute of Supply Management diffusion index (ISM) and long term inflation expectations from the 10 year breakeven.

Fed Happy_6

If these trends continue, and the Fed seems set on keeping them going, the likelihood of a recession will be increasing as the year progresses.

Update: Stephen King gets it right:

Conventional wisdom suggests lower oil prices should provide a shot in the arm for the global economy. In current circumstances, however, lower oil prices may simply be providing over-enthusiastic central bankers with an opportunity to shoot themselves in the foot.