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Minneapolis Fed President Neel Kashkari starts October with his essay 'My take on inflation'. While it's not a real change from him, he argues that the Fed should NOT be rasing until there in inflation and removing accomadation part of the deflation issue. What has befuddled the Fed is we have unemployment down from 10 to 4,4% and yet there has been no boost to inflation or a rapid surge in growth. 

There are a number of issues we could bring up here, first to mind is the unemployment rate is not a true reflection of the actual rate with so many not counted, not participating and simply the depth of the so called black economy. We then have the so called artifical employers such as the NSA, TSA and the Affordable Heath Care Act. So many jobs created here and the wages set by a government in a non competitive environment. The sauce of pay, deficit spending. So there's a pretty obvious reason why we don;t have wage inflation and the flow on consumer inflation.

PCE Inflation 10 17 Minn FedKashkari believes shouldn't raise rates until core inflation at 2%

We start with the above chart which 'shows the personal consumption expenditures (PCE) measure of inflation, both headline and core, since 2006. Inflation has been consistently below our 2 percent target over the past five years and, perhaps even more surprisingly, has actually fallen this year." Read this in light of above point on job creation, makes sense to have this result on PCE.

Moving onto Kashkari he starts with letting us know he thinks different form Fed Chair Janet Yellen; "Federal Reserve Chair Janet Yellen offered her thoughts on this topic in a speech last week, and I appreciate her raising this discussion publicly. I draw somewhat different policy conclusions than she did, but I agree that this is an important issue that needs more analysis before we can have confidence in our understanding of why inflation is low. "

Fed should proceed with caution before tightening further

long term inflation expectations

"Aas you can see in the following chart, inflation expectations—as indicated by both market-based measures and the Michigan survey of consumers—did begin to fall in early 2014 soon after the FOMC began to remove monetary accommodation. The actual policy change of tapering QE began in December 2013, while then Fed Chairman Ben Bernanke began discussing the taper in May 2013."

The economy would likely have performed better had the Fed not removed accommodation

federal reserve balance sheet

When the Fed began discussing tapering QE in mid-2013, it effectively began the process of removing accommodation by significantly changing expectations of further QE. And once the taper was complete and the Fed’s balance sheet was fixed at $4.5 trillion, its stimulative effects began to shrink, albeit slowly, relative to the growing U.S. economy. In addition, the end of QE also signaled an end of the commitment of the FOMC to use extraordinary measures to support economic activity at that time. That also would likely have a contractionary effect on the economy through expectations of tighter monetary policy.

Fed hikes are likely driving down inflation expectations

federal funds rate and projections

The Fed was either trying to prove it was right since the GFC and its response or were hell bent on raising rates to head off the 'obvious' inflation spike that was coming. History shows them to have erred and hard to argue with Kashkari here;

In my view, inflation expectations declined because actual inflation was below target for a long time, and the Fed’s actions to reduce accommodation led to a weakening of confidence that it was serious about bringing inflation back to target in a reasonable time frame.

Causes of persistently low inflation are additional domestic labor market slack and falling inflation expectations

"Here is a chart showing how the median FOMC participants’ estimates of the long-run FFR and maximum employment have changed. The implication of these revisions, admittedly with the benefit of hindsight, is that monetary policy was less accommodative than we previously thought. And over the past five years, we have overestimated inflation and underestimated how long it would take to return to our 2 percent target."

long run SEP projections fed funds target unemployment

Further to the earlier point, what is clear the FOMC actually believed they were providing more stimulis than the were. For mine I find it hard to believe that they failed to recognize that the banks were not using their bailout money to spur the economy, they were plaugging losses and chasing finacial asset. To wit record U.S. stock market highs. From there higher bonuses, there is no incentive to 'do the right thing' when moral hazard was removed which the Fed and the US Administration has done since 2008.

On rates he offers "My preference would be not to raise rates again until we actually hit 2 percent core PCE inflation on a 12-month basis, unless we have seen a large drop in the headline unemployment rate signaling that we have used up remaining labor market slack, or a surprise increase in inflation expectations."

Some logic again from Kashkari with an admission that they got it wrong and a way forward with caution.

Read the Full Essay here : My Take on Inflation Neel Kashkari | President Published October 2, 2017

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