Monetary Policy: A Nut Here, a Crouton There
The Federal Reserve released its minutes today and the PhD’s at the Eccles Building are losing sleep over the lack of price inflation. After all, they spent years huffing and puffing and blowing liquidity into the banking system and their balance sheet is still engorged with treasuries and agency debt. Prices just haven’t taken off in a smooth 2% rising glide pattern.
Also the plan was to start letting some of that balance sheet bulk mature away, but now Reuters reports, “Federal Reserve policymakers appeared increasingly wary about recent weak inflation and some called for halting interest rate hikes until it was clear the trend was transitory, according to the minutes of the U.S. central bank's last policy meeting.”
"Many participants ... saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside," the Fed said in the minutes.
Jeffry Bartash, writes for MarketWatch, “Yet the Fed’s own staff in July slightly reduced its 2017 forecast for inflation as many senior officials saw a greater likelihood that ‘inflation might remain below 2% for longer than they currently expected.’
The measurement of price increases is tricky business. “Fed Chair Janet Yellen said last month that special factors, including price drops for mobile phone plans and prescription drugs, were partly responsible,” write Lindsay Dunsmuir and Jason Lange.
It’s hard to imagine the price action of mobile phone plans and prescription drugs impact Fed policy. After all, in a rare bit of candor “a few policymakers cautioning that the central bank's framework for analyzing inflation was ‘not particularly useful,’ according to the minutes.”
In her book “Fed Up,” Danielle DiMartino Booth wrote of her boss, head of the Dallas Fed, Richard Fisher, “He had real problems with the Fed’s designated measure of inflation, ‘core’ personal consumption expenditure (PCE), which ignores the prices of food and energy and thus did not reflect inflation’s true level.”
She wrote that when the current Fed Chair headed the San Francisco branch of the Fed, “Top corporate leaders in Yellen’s district--even bankers on her own board of directors--thought she was a clueless academic more interested in labor issues than the dilemmas of those running businesses.”
But the Fed has a plan and its sticking to it. Back in March, Grant’s Interest Rate Observer sent its Harrison Waddill to tag along with a “government inflation scout” who was gathering prices for the Bureau of Labor Statistics (BLS) at a New York supermarket.
The BLS price policeman told Waddill, “Sometimes, an item that I’m supposed to price isn’t on the shelf when I arrive.” The BLS man related a story about a store no longer carrying the prepared salad he was told to price. He decided to substitute a fruit salad, and finally “found prepared prices of fruit.”
The home office was not amused. His substitution didn’t pass muster with the BLS brass, “not enough nuts or croutons,” he was told, and was given “a list of different items (not salad) to price instead.”
Grant’s wrote back in March, “we wonder about the margin for conceptual error in the processing of the statistics so carefully gathered.”
The weight of the financial world waits breathlessly on Fed bureaucrats to grid numbers into policy that will supposedly produce prosperity out the back end: When in fact the numbers they are working with are just this side of random. DiMartino Booth points out that while she used actual data, the PhDs that snubbed her, seasonally adjusted or manipulated the numbers in some other way, to make their byzantine formulas work out.
Meanwhile, John Williams’ Shadowstats.com has CPI at roughly 5% or 9% depending upon how old-fashioned a calculation is performed. Using 1990 metrics 5% is what price inflation is, while 1980 methodology generates 9% CPI.
With Williams’ numbers in mind, Reuters reports,” Others [Fed committee members], however, cautioned that such a delay could cause an eventual overshooting in inflation given a tightening labor market ‘that would likely be costly to reverse.’”
The end result may be more than a nut here and a crouton there.