Tuesday, August 15, 2017

July 2017 CPI Update

New trends seem to be holding.  For the third month in a row, core CPI inflation, excluding shelter, was at 0.6%.  Shelter inflation continues to slowly moderate from last year's level.

Not much to do but keep watching.  Things could still go either way.  It does appear that today's reading caused Fed Funds Rate expectations to fall a little, with the expectation that the Fed might pull back on the pace of rate hikes.  That is good news, I think, although I still suspect that the baseline scenario here will be that a rate decrease will be in order, and that is simply outside of the Fed's current frame of view.  In that case, they would hold rates level, considering that accommodative, when it would really be a tightening.  And, the tightening would worsen as the rate remained there, just as it did in 2007.

1 comment:

  1. It is hard to comprehend the current mindset that the Fed must raise rates and shrink the balance sheet.

    It is some sort of ideology or class bias at work, but self-destructive. It may be a form of religious deontology unconsciously transferred into monetary policy, which I used to call "theomonetarism."

    Or maybe it is just "signaling." That is, a money manager or academic who pontificates against an "easy" Fed is sending a signal to clients he is a right-winger, etc., and worthy of support, and yet says nothing offensive to clientele.

    In sum, it is nuts (and I no left-winger. I think social welfare programs do not work. But then, military occupations do not seem to work either).

    After Bullard's speech…well I am speechless. Bullard says lower unemployment, even to 3% will still not budge the PCE to 2%. And 2% is supposed to be an average, not a ceiling.

    So now is the time to raise rates, and shrink the balance sheet.

    I do not know if the small quarter-point budges in interest rates will do much damage. With global capital markets flush, maybe the Fed sucking a few trillion out by selling bonds will not destroy growth.

    I still think money-financed fiscal programs are the most effective and simple and comprehensible way to go.