Inflation compensation is “low” — seemingly always

Market-based measures of inflation compensation have moved up considerably but still are low….

So said the Fed in its Press Release yesterday, ignoring for the moment the misplaced modifier, which brings to mind existentialism.

I thought it odd that inflation expectations could rise considerably TO low.  So I refreshed my memory by going back and looking at how the Fed had characterized breakevens in past statements and found a pattern.

When the 10-year breakeven had recently been around 1 1/2% or higher, the Fed said plainly that inflation compensation had remained low.  When the breakeven had fallen to a more unnervingly low level, the Fed chose not to characterize the level but just to note that inflation compensation had fallen.  This is part of the “clarity” on which Fed officials so pride themselves. *

In some of its published research and in speeches over the past couple years, the Fed was more direct about the fact that breakevens were low but invented the story that it did not matter because the breakeven decline was about a falling “inflation risk premium”, rather than low inflation expectations.  That was one way to tell they were fibbing and that the consensus Fed watcher was too hawkish, in part by being gullible of Fed communication.

Seriously guys, you don’t have to believe everything they say. They are human and fib. Knowing this is not a “conspiracy theory.”  I think they have actually DONE a pretty good job since the crisis. It it just that it may be easier to anticipate the next pretty good thing they will do if you pierce their occasional fibbing.

So anyhow, breakevens have risen “considerably” TO low. Good to know!  My chart is slightly out of date, but just eyeballing the screens it looks like the breakeven on CPI is just below 2%. Given that a sliver of this is just the oil price move not yet in the CPI indexation  and given further that the deflator rises about a quarter point less (a year) than the PCE deflator (as a best guess), I agree inflation compensation is low relative to the Fed’s inflation objective.  What inflation compensation was in the past is a separate matter — and for me, a source of amusement.

I think the Fed will want to see the core PCE deflator inflation rate go sustainably above 2% for a while, for reasons I have discussed in the past and will not reiterate here. I hold this view with less confidence post election — and its practical relevance is much reduced given the repricing and the fact that inflation has itself risen — but it remains my base case.

Higher core PCE inflation might help get inflation expectations a bit higher, assuming as I do a roughly similar move in the outlook for CPI.


* This is not the main point and to lean on it too hard could fairly be called “conspiratorial.” But just for fun, if the Fed reacts to the breakeven adjusted for the inflation risk premium, then why not comment on that in the Press Release?  Every month they mention what doesn’t matter.

Huge fan of Slate, but…

I have become a huge fan of Slate, particularly since the election. Unlike most of the lame stream media, they have not decided that Donald Trump coming second in the election means that all his flaws have gone away. Trump is a menace to the constitution and they are staying on the story. Good for them.

But they probably should not discuss macroeconomic policy.  It is not their thing. Low interest rates have not been a huge break for taxpayers, because taxpayers also feel the effects on the income side of low interest rates.  And the Fed raising rates has not surprised the CBO or been a likely cause of the CBO reassessing its already somewhat daunting projection for the Treasury’s net interest bill.

Also, the idea that Donald Trump has forced Yellen to raise rates — either by bringing fiscal stimulus, or demanding higher rates — is quite a stretch. We shall see.  But I bet you all that bluster about how the Fed needs to be tighter will be shelved with much other BS now that the GOP has full control.

In fairness, I would not bet a lot.  Uncertainty around how the government will influence the Fed has widened, on both sides.  Congress might hire John Taylor, a contractionary error, or it might decide just to let things rip, an inflationary error. These guys are less predictable than the (non fake) centrist technocrats previously in charge, for good or ill.

Trump to “blame”

Speaking of the lame stream media, I found this headline from The Hill — repeated elsewhere — quite jarring.


 I had made the point on the guy on the next bar stool at my local just two days ago. So I guess I agree. But it struck me as pretty shallow and petty for a member of the US security administration to say such a thing.  The issue is not whether Trump would get the blame for the attack, but whether he would be — you know — objectively responsible.  You can’t go through all of life thinking there is no reality and all that matters is opinion polls.  Christ!

The thing is, Pancetta did not say what the headline attributes to him. Here is what he said, with emphasis added:

“If we endure another attack and the intelligence officials had indications or information regarding that attack and the president did not want to listen to that, for whatever reason, the responsibility for that attack would fall on the president,” added Panetta, who also served as President Obama’s Defense secretary from 2011 to 2013.

In my view, that is the right way to express this important idea. It goes to reality, not perception. But the lame stream media have trouble with that distinction, particularly these days.