Why talk about the “living” when they´re handsomely compensated to elucubrate about the “dead”?

Walking dead_0

My partner James Alexander sent me something that gave me this idea…

And the “dead”, as you may have surmised, is Inflation!

As the chart depicting (from the Atlanta Fed Inflation Project) the flexible and sticky CPI YoY inflation makes very clear, inflation has been dead for at least a quarter century.

Walking dead_1

What the chart makes clear:

  1. An inflationary process, like during the “Great Inflation” of the 1970s, is characterized by increases in both the flexible and sticky components of the CPI (or any other price index)
  2. When you have price shocks like in the 00s, where between 2003 and 2008 oil shocks were prevalent, the flexible components “swing along” while the sticky components “stay put”. That´s the outcome when the Fed is successful in maintaining nominal stability (satisfactory NGDP growth along an adequate trend path).
  3. When, as in 2008, the Fed, suddenly fearful of price shocks that disturb the flexible components, engineers a massive demand shock (deep drop in NGDP) to quench “inflation”, the result is a long depression! Note that even the sticky prices are affected!

To justify their handsome remuneration, our sages at the Fed keep “talking-up” a problem that has long been dead. Much easier than worry about the (sometime barely) living!

The multiple faces of inflation

The Atlanta Fed´s “inflation project” provides us with alternative measures of CPI inflation. It separates flexible prices from sticky prices and, in addition, subdivides both the flexible and sticky components into their core measures. It also provides the sticky measures excluding shelter inflation.

Yesterday, the St Louis Fed tweeted the following chart, indicating that headline sticky annualized CPI inflation had reached 3.5% (Oh my God!) in September.

Inflation Faces_1

In a recent post, Kevin Erdman arrives at a very sensible conclusion:

This week, expectations of a Fed rate hike have moved back from the December meeting toward the March meeting.  That would be helpful, given that outside of the rent inflation caused by the housing supply depression inflation continues to be at a 50 year low.

In the meantime, considering the decade long depression-level behavior of housing starts, calls for monetary contraction because of inflation that is largely the product of rising rents are indefensible.

My point is that a target that has “multiple faces” is a dangerous target indeed!

In addition, presenting the multiple-faced target in a noisy format (annualized rates), is “criminal”.

Let´s see some examples.

Superimposing the headline sticky year on year (YoY) rate to the headline sticky annualized CPI inflation tweeted by the St Louis Fed, we get a very different picture of trend inflation.

Inflation Faces_2

And comparing the sticky YoY Core-CPI with the sticky YoY Core CPI-Ex shelter we see the reason for Kevin´s conclusion.

Inflation Faces_3

Note: House Starts:

Inflation Faces_4

Elusive guidelines

For some time the economy has been ‘playing tricks’ on policymakers, in particular those at the Fed, concerned with monetary policy.

For more than one year, they have been signaling that the beginning of ‘policy normalization’ (aka the first rise in rates) was imminent, but at each turn something happened to thwart their ‘desire’.

It´s interesting to note, in that context, the ‘bias’ in some of the research being done at the research departments of the Federal Reserve System. Some would indicate that the Fed should start the normalization process now. Others that it could still wait a while.

In the first category, the San Francisco Fed has just released a study downplaying the fall in inflation expectations provided by market-based measures:

A substantial decline in market-based measures of inflation expectations has raised concerns about low future inflation. An important question to address is whether the forecasts based on market information are as accurate as alternative forecasting methods. Compared against surveys of professional forecasters and other simple constant measurement tools, market-based inflation expectations are poor predictors of future inflation. This suggests that these measures contain little forward-looking information about future inflation.

Another, from the Richmond Fed, indicates that we´re in ‘overtime’, given that the natural (aka Wicksellian rate) has for “a long time” been higher than the market rate:

The natural rate of interest is a key concept in monetary economics because its level relative to the real rate of interest allows economists to assess the stance of monetary policy. However, the natural rate of interest cannot be observed; it must be calculated using identifying assumptions. This Economic Brief compares the popular Laubach-Williams approach to calculating the natural rate with an alternative method that imposes fewer theoretical restrictions. Both approaches indicate that the natural rate has been above the real rate for a long time.

Going in the other direction, Mark Thoma discusses the ZPOP measure of the labor market developed by the Atlanta Fed:

The Fed has a difficult job. It must assess how close the U.S. is to full labor force utilization, and how that translates into inflation risk. Both steps of that process involve considerable uncertainty. The Atlanta Fed’s new ZPOP measure attempts to provide additional clarity, but as the researchers acknowledge, this measure isn’t perfect. In the end, the Fed will always have to make its monetary policy decisions based on incomplete information about the economy.

The panel below extends the ZPOP chart of Thoma and the Atlanta Fed to show how the story could have been different (and we wouldn´t be unduly worried about what´s the best measure of inflation expectations, interest rates being below the ‘natural rate’ or what´s the better labor market indicator).

First off, the best thing would have been for the Fed NOT to allow nominal spending (NGDP) to tank! Since it did, the best thing would have been to crank it up at a higher rate, to try and get as close as possible to the original trend level path.


Don´t argue that was not possible, because if the Fed can ‘choose’ one level of spending it can ‘choose’ any. And look how it allowed NGDP to grow at a higher rate after the mistake of 2001/02. This time around, it stopped the rise in NGDP growth too soon!

The Fed has allowed the economy to remain ‘depressed’. And in a ‘depressed’ economy, the ‘gauges’ of performance (most likely) behave differently, and that´s causing a lot of anxiety.

Note: But there are the diehard RBCers, like Ellen McGrattan who write Monetary Policy and Employment:

 Neither conventional nor unconventional monetary policy has much of an impact on employment. What does? Factors that drive the labor-leisure decision.

Atlanta Fed Says Q3 Real GDP At 1%–Wait, 0.9%–Oh No, 0.7%

A Benjamin Cole post

It is getting harder and harder to keep a straight face and say the U.S. Federal Reserve should tighten money.

From the Atlanta Fed:

“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 was 0.7 percent on August 13, down from 0.9 percent on August 6. The previously reported nowcast of 1.0 percent for August 6 was revised down due to a minor adjustment in the method for nowcasting investment in computers and peripherals. Since a week ago, the nowcast for the contribution of inventory investment to third-quarter real GDP growth has declined from -1.8 percentage points to -2.2 percentage points. This decline more than offset an increase in the nowcast of the third-quarter growth rate in real consumer spending from 2.9 percent to 3.1 percent after the release of this morning’s retail sales report from the U.S. Census Bureau.”

So, let’s see, Q1 was dead, and Q3 will be dead, in terms of real GDP growth. And Q2 would have been tossed back into the water in most of the 1990s.

But Janet Yellen and the Fed are still talking about those rate hikes. They sound like a crack-head discussing the next coke fix—there is no other topic in the room.

I have a really bad feeling that what the Fed should be discussing is QE and wiping out IOER. But they can’t. It would not be PC. The Fed is trapped appeasing the utopian monetary dogmas of partisan-eccentrics, and by its own institutional hubris and rigidities.

The Fed cannot say what it should say, which is, “Man, we have been wrong, over and over and over again. The economy is weaker than we forecast, again. Ergo, we are going to gun the presses good and hard for a real long time. Way longer than ever before. Screw our forecasters, they are obviously biased.”

You will never hear a speech like that from the Fed.

Dudes, this could get ugly.

Atlanta Fed Says Q1 U.S. GDP At Standstill; Nation Below Target-Inflation, Interest Rates Falling; Fed Ponders Rate Hike

A Benjamin Cole post

The Atlanta Fed, usually a quiescent bunch, just X’ed out growth in its Q1 forecast GDPNow index.

Of course, headline inflation is at 0% and rates on 10-year Treasuries are skidding below 2%. Hiring is seizing up, the Dow is stutter-stepping, and unit labor costs have not risen in six years.

And the Fed?

The Fed is endlessly jibber-jabbering about raising rates and getting back to normal.

I have some advice for the Fed: From the clues I detect, raising rates will not get you back to normal. My other advice to the Fed is to send reconnaissance teams to Europe and Japan. It you think now is not normal, wait ‘till you see what comes next.

Back to The Future: QE

I have been tooting all along that the Fed should stay with QE, adding my kazoo to the cacophonic, conductor-less global orchestra of macroeconomic e-pundits.

But, perhaps it wouldn’t matter if I had Gabriel’s Trumpet, and not a kazoo.

I suspect Janet Yellen is marching to the Fed’s own drum, and the beat goes on. And on. And on. And on