Federal Reserve Vice-chair Stanley Fischer tries to calm down the Bloomberg airhead here by insisting that we do not have high inflation and that we are “moving toward” 2% inflation, which is a desirable outcome.
I have learned not to take Stan Fischer at his word. Here, for example, is a passage from his most recent speech, as channeled (favorably) by Tim Duy’s Fed Watch:
One important but underappreciated aspect of the SEP is that its projections are based on each individual’s assessment of appropriate monetary policy. Each FOMC participant writes down what he or she regards as the appropriate path for policy. They do not write down what they expect the Committee to do. Yet the public often misinterprets the interest rate paths we write down as a projection of the Committee’s policy path or a commitment to a particular path.
Really, Stan, you are going to draw a distinction between what the FOMC members write down as their best guess for rates under optimal policy and what they actually project optimal rates policy might be? You sound like a medieval Catholic. Maybe Talmudic scholarship and Jesuitical sophistry have a common root. * Who knows?
What chaps my ass is that these guys come out with nonsense like this and then complain that the pubwic just wefuses to understand us. Boo frickin hoo. I want my mommy.
And then the consensus Fed watcher jumps on and says, so true. Stupid public! Can’t even understand the Fed, which is so crystal clear.
But in this case, I think Stan is onto something. The guys at the Fed probably have roughly the same spreadsheet that economists at JP Morgan very competently run, which allows them to relate the individual price detail in the CPI and PPI reports to an estimate of the core PCE deflator for the same month. A friend at JPM tells me they have guessed to their clients 0.35%. I bet that is pretty close, so I will just pencil it in for January, in the chart below.I have just a couple quick points about the chart. First, the left panel is meant to show that the Fed has been chronically undershooting its objective this entire expansion, not to mention the period just before. This is true for the core, shown, and true also for the headline, although that is not shown.
The purpose of this left panel is not to imply that the Fed needs to make-up for bygones, although I am not against that personally. Their stated objective is to deliver a 2% average inflation rate over time, looking forward only. Ok, so get on it! Capping inflation at 2% at the top of the cycle would not be consistent with that objective, as I have pointed out so many times that I won’t even provide the link.
Second, boring! Macro Shitposts on Twitter calls the January price data 3.7 adjusted Brentwood Hellos from the mean. So good. Follow that man. But the firm (implied) core PCE “print” for January follows some low ones in December and especially November. So the rising trend in the 12-month trailing is pretty gentle.
Therefore, Hey Fed, don’t just do something, stand there! Rather than screw it up by over-reacting to the still-too-shallow rise, and then find yourself back in liquidity trap, having to lie about the most exotic of remedies, just let this run a bit.
I think they will. My forecast is they don’t overreact, which is slightly different from saying they follow the path implied by futures. That comes across in Fischer’s video with the Bloomberg airhead. On this I am willing to believe Fischer. FWIW, I think Fed guys generally do a pretty good job, even if they way they describe what they are doing totally stretches credulity.
* The real issue here, as I see it, is that the case for providing rates guidance evaporates once the Fed escapes the logic of liquidity trap. The timing of the coming and going of formal rates guidance is perfectly consistent with that interpretation. Or perhaps I should say, that that interpretation has been tightly subjected to falsification and has survived. But the Fed is locked into providing dots because of inertia, I guess. The way they get around this is to downplay their importance, which is totally fair. But the way they do this is so bizarre and in Fischer’s case involves ridiculous sophistry. You may want to argue the minutia with me about this. No if you really read what he is saying…. Fine, I am often wrong. But would you cut that argument that slack if it were not offered by an official at the Federal Reserve, which can ruin your day, your week, your quarter, and your year? Don’t fall for Stockholm Syndrome.