Wednesday, June 14, 2017

May 2017 CPI and our benevolent monetary overlords

Well, here we go.

CPI less food, energy, and shelter, is down to 0.6%, TTM.  It looks like shelter inflation might have peaked too.

The three month drop in the non-shelter core measure is the worst drop since the BLS began tracking it in the 1960s.  Down about 0.5% since February.

And the Fed raised rates.

This is different than the last recession, though.  Things aren't lined up the same.  We're still raising rates, so rate-sensitive things may still be similar to a 2005 or early 2006 time frame.  That has me a little confused.  I'd like to take some positions that would benefit from falling rates, and the yield curve is already moving down.  But, if the Fed will push short term rates up one or more times, it muddies the water a bit, because the entire curve tends to react to those moves, if only temporarily.

Employment still seems relatively strong.  Flows are holding up pretty well.  That also looks like 2005 or 2006.

Inflation looks like the middle of 2007.

General credit is still growing, it seems.  But, bank credit is flat as a pancake, which is usually a coincident indicator.  Even without these inflation indicators, I would be a little nervous to see rates being pushed up with bank lending so weak.

I think the Fed is committed to recessionary policy at this point.  If (when) they push rates up to much, I don't think they will be quick in reversing their decision, either.  It's a matter of when the various moving parts affect different markets, though.  When do interest rates decline?  When does the labor market turn sour?

I don't think we will see much downward movement in home prices, housing starts, or equity prices unless things get really bad.  And, I still am having a hard time coming up with a detailed forecast for some of the other markets.

If signals turn south over the next couple of months, maybe the Fed will hold off.  But, the Fed sees this softness as temporary, and if some inflation measures have been temporarily down and bounce back, the Fed might see that as cover to raise again, maybe even in September.  I would expect that to lead to a fairly immediate flattening of the yield curve, after which it would be a matter of time before the Fed relents and lowers rates.  It used to be common for rates to peak and fairly quickly be lowered again.  But, lately, the Fed seems to like to sit at the peak rate level for a while before they are willing to lower rates in reaction to economic softness.

I think that's because Closed Access creates a sense among the public that nominal stability only benefits existing asset owners, so there is a strange demand for instability.  I don't see that changing in this cycle.


  1. I am happy to say I agree with this post entirely, no quibbles.

    Moreover, banks will 0.25% more reason to cut lending staffs, go to sleep, and collect money for nothing on their reserves.

    1. You're right. We're actually getting to a point where they can get a positive real return from reserves. Yikes.

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