I have been arguing that the Fed should and will aim at above-2% inflation in the late cycle. They will do this as it seems to be required to hit their formal target of 2% on average over time.
This has nothing to do with bygones. Instead, if I am right it reflects that the Fed recognizes that inflation is likely to be stuck well below its late cycle peak in the wake of the next recession. Basically, a central bank cannot plan always to be at or below average. Sometimes they have to plan to be above.
Not everybody likes this idea (good!) because to some it sounds silly to aim at one number if you want to hit another. Whether this makes sense turns on whether inflation can be expected to fall and then stay low after a recession. I say it can. Whoever is right, my claim is that the Fed will aim at inflation above 2%, not just tolerate the risk of it.
I have had this view a while and I humbly submit it has “worked.” Having a bit of competitive spirit, I take pleasure in seeing Fed watchers insist that the Fed should always aim at its target and then get all angry that they can’t for the life of them figure out why the Fed is behaving as it is. Can’t the see that with all this delay inflation will rise above 2%?! Te he.
To a much lesser extent, this perspective allowed me to see that inflation breakevens were a bit too low at 1.5%. The bond market was speculating that the max-consensus take was right and that below-target inflation, on average, would result from it.
(Data to close two days ago. Slightly dated.)
My call was that the Fed leadership could do arithmetic just like the bond market can. But it is not like breakevens have surged. They are now a bit less clearly too low. That makes it a slightly tougher call from here, but not time to go the other way. Yes, this is a hell of a lot of words for 50 bps. Tell me, Gerard, how did you feel about the euro’s move from 1.1475 to 1.1525?
The problem for me is that I have no idea what the fool the US just foolishly elected president and his allies in the Senate are going to do with the Fed. Goldman tells us that the Fed leadership is stable for a while, which I guess means that my take on the Fed’s priorities will be right for the next year if it was right for the past couple. So I guess I should just stick with this story.
But it is pretty stale in two ways. First, it really says nothing about the fed funds futures strip, because the Fed going in December, with core inflation at 1 ¾% and apparently edging higher, would not be the least at odds with it.
Second, my faith in the Fed doing the right (by my lights) thing over time is just lower. People who are now talking about the election as a worry from the past are just not paying attention, as I pointed out in an update in my last post. There is a pretty good chance of a lot of STUPID coming down the pike.
I am in shock and biased, so I guess I am in no position to be pushing ideas that try to predict or exploit the STUPID. I would rather just be Sgt. Schulz from Hogan’s Heroes.
I know nothing.
Somewhat related, here is an example of a liberal who also has NO CLUE what monetary policy does. What is Yellen supposed to do,stop the Russian tanks just outside the Baltics by dropping $20 bills along the borders? Actually, that might work.
In fairness to Daniel Gross, he did not pick the very silly title of his only somewhat silly article. The mainstream media have some splaining to do. At least at Slate, they had the good sense to be unremittingly alarmist about the election.