FOMC: Upside Risks to Inflation

The well-parsed FOMC statement remains too cheery on growth, not concerned enough about inflation — and is totally irrelevant.

What matters is whether the Fed can tighten or loosen rates or not — and they apparently cannot. The Fed has painted themselves into a box, with a recession, housing collapse and credit crunch on one side, and $140 Oil, rampant food and other inflation on the other.

What’s a jawboning Fed Chair to do? As little as possible . . .

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Parsing the FOMC Statement
Infofedparse0806_2
via WSJ

 

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  1. bk commented on Jun 25

    The federal reserve is only concerned with making things as good as it can for the member banks which own it.

    Why should we be surprised that they do not really fight inflation?

  2. Ben commented on Jun 25

    I think the Fed hopes the oil price can and will come down, perhaps letting the ECB to deal with the inflation problem. Once again, the Nasdaq the leader today.

  3. Estragon commented on Jun 25

    BR – “The Fed has painted themselves into a box…”

    So the big question now is “how long until they close the lid on the box and lower it gently into the ground?”.

  4. Al Czervic commented on Jun 25

    Well, the statement may be “too cheery on growth” but I doubt that the Fed members actually are. Problem is, if they’re trying to talk tough about one thing (inflation), then they have to pretend that the other (growth) is less of a problem. Can’t very well come out and say that both suck, can they? That would be admitting to stagflationary expectations and the fact that they’re screwed.

  5. Nihilism commented on Jun 25

    let’s talk tough on inflation; and say better things about the economy & hope that dollar’s problems will be solved. S&P was 1180 in June 2004 — and will go back below that level before fed becomes relavant again.

    Ginnie is out of the box and fed will be proved irrelevant for the rest of the year.

    IF they raise: financials & commodities get hammered — value side of the box/equties goes down.

    If they lower — lower dollar and can’t imagine how the rest unfolds.

  6. larrybob commented on Jun 25

    i don’t get BR’s bluster…with housing prices deflating, wages certainly not inflating, and no consumer demand to dampen, you want the fed to raise rates? just cause some commodities are high while others have already cratered?
    i guess the boastful rhetoric that about the “Fed painting themselves into a corner” gets under my skin. my god, you just posted an interview that states that deflation is the real risk as thoughtful and provocative. greenspan was a serial bubbler, but i don’t think you can make the same charge against his replacement.

  7. David Kotok commented on Jun 25

    Last week we wrote about some reasons why the Fed would not raise interest rates. In the statement today they also discussed the reasons they would not cut them (inflation risk). In our view the Fed has done exactly the correct thing in keeping the Federal Funds rate at 2%.

    Furthermore, we are encouraged to see that the vote was 9 to 1 with only Dallas president Richard Fisher dissenting. Charles Plosser, president of the Philadelphia Fed, had dissented in the past but voted with the majority this time. The change in Plosser’s position is important and can be distinguished from Fisher’s continued dissention.

    Fisher is admittedly not an economist although he is experienced in financial markets. Fisher’s view is globally oriented in a commerce and trade direction. He has shown that leaning in his activities at the Dallas Fed and in his speeches around the world. He worries about inflation and about trade imbalances. Clearly this is influencing his thinking. That is okay but the issue for the FOMC is the US economy first; globalism comes second.

    Under the Fed’s new rules each of the presidents has to forecast economic elements over the next three years. In this instance Fisher’s continuing dissent suggests his outlook for the US economy over the next three years is little changed from the previous meeting.

    Plosser is a trained and experience economist with considerable history in monetary policy. He has substantial academic credentials and was a member of the Shadow Open Market Committee in an earlier time. He has published academic research and some scholarly work on business cycles. He has international experience and is also a global thinker.

    Like the other presidents, Plosser has a forecast that he submits and it articulates his views of certain economic variables over the next three years. Plosser, too, has a research department in his Federal Reserve Bank to help him but his experience suggests he will be more personally involved in the making of the forecasts than will Fisher. This implies that Plosser’s views of the US economic outlook have changed since the last FOMC meetings where he dissented. Furthermore, the fact that he now voted in favor of no change in the Federal Funds rate implies that Plosser sees the US economy as weakening and that the risk of continuing weakness has risen. Plosser is wearing his US oriented hat first; that is as it should be since that is the primary responsibility of the FOMC

    -snip-

  8. HCF commented on Jun 25

    Problem is…
    Inflation is a much harder problem to get yourself out of, but recession feels worse in the short term, and as such makes those in charge when it happens very, very unpopular. So it’s question of mild pain now, or severe pain later vs. popular now or unpopular later. Volcker is one of the few who truly understood this when he intentionally dive bombed the economy in ’82, which was one main drivers behind the 80’s-90’s boom. Herein is the problem with a dual mandate.

  9. DL commented on Jun 25

    Dove or hawk?

    We’ll find out who the real Bernanke is after November 4th.

  10. Estragon commented on Jun 25

    Larrybob – “greenspan was a serial bubbler, but i don’t think you can make the same charge against his replacement.”

    Assuming we can look to the level of real interest rates as an indication of each fed’s bubblemaking, this chart may be instructive.

    Note that current real rates, at about -2%, are lower than at any time during Greenspan’s “serial” bubble blowing.

  11. scorpio commented on Jun 25

    CNBC headline summary of FRB comments “FRB: high level of uncertainty re inflation”. my recasting of that sentence: “you have to be high to think inflation is anything other than a certainty”.

  12. Eric commented on Jun 25

    Here are just the last couple sentences of a long comment by Howard Simons just now on the FOMC statement: “My reading of the FOMC Statement today can be summarized as, ‘Uh oh. Now what do we do?’ That is followed by some gibberish on growth and inflation. At least Greenspan’s language was amusing.” God bless Howard Simons. Anyone who says there is a more insightful writer at TSCM is a horrible, horrible human being.

  13. Justin L Tindall commented on Jun 25

    Estrogon, your sweet! Can I be a pall bearer? I’ve been doing curls in advance of the need to fight off the public who have no idea that things are going to get real bad!

  14. Farmera1 commented on Jun 25

    A couple of areas feel like bubbles to me:

    -Ag: Corn, Soy beans, wheat at record highs and IMHO going higher. Inputs up 70% (including land rents, chemicals, fertilizers, herbacides (all three based on hydrocarbons))or so this year. All feels like a bubble to me or at least out of control inflation.

    -Oil: If not a bubble at least a big amount of foam.

    The funny thing is both of these areas could be flying in bubble territory for years to come. Depends on a couple of things like is
    peak oil real (it has been for a couple of years). Is the climate changing and will it be more difficult to produce crops like we have in the past? Looking at Iowa (the Saudi Arabia of corn), I see nothing but higher prices for corn and soy beans ahead.

    We have had serial bubble blowers running the Fed for years. If anything judged by his negative real interest rates, Bernanke out Greenspans Greenspan.

    Definition of Bubbles from Wikipedia: Bubbles “trade in high volumes at prices that are considerably at variance from intrinsic values”. [1][2]

    “The cause of bubbles remains a challenge to economic theory. While many explanations have been suggested, it has been recently shown that bubbles appear even without uncertainty,[3] speculation,[4] or bounded rationality.[5] Most recently, it has been suggested that bubbles might ultimately be caused by processes of price coordination[6] or emerging social norms.[5] Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often identified only in retrospect, when a sudden drop in prices appears. Such drop is known as a crash or a bubble burst. Both the boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate chaotically, and become impossible to predict from supply and demand alone.”

    So then you go to intrinsic value and the talk is about the labor theory of value. I will guarantee you the labor to produce a bushel of corn is dropping there for the intrinsic value should be dropping, but wait it isn’t. So by these definitions, ag is in a definite bubble.

    As Greenspan said about bubbles”… we just make’m, we don’t identify’m” or words to that effect.

    John aka farmera1

  15. Chris Noyes commented on Jun 25

    At the end of June ( 30th ) big oil will come out and say they are pumping oil out Iraq. Then after July 4th weekend Iran will get bombed mid July . Oil hit’s 175 and you will see the FED panic.

  16. dave54 commented on Jun 25

    WHAT ABOUT BEN: Inflation rages worldwide, but Bernanke’s such a committed deflation fighter that he can’t even bump rates a ‘pin-prick’ 1/4 point? It’s like with wildfires raging in “Kali-forni-a”, and their governor’s hydrophobic…Say “hello” (again) to $140 oil & $1000 gold.

  17. Greg0658 commented on Jun 25

    John aka farmera1 question for you – what would a bushel of corn or soybeans be worth without oil as a production helper?

    And then I wonder what the bushel cost would be via soy-diesel tractors assisted with whatever fertilizer can be made from non-oil tech.

  18. pft commented on Jun 25

    How does raising interest rates affect the price of oil, food, health care, drugs and tuitions in an economy that is losing jobs and exporting production capacity abroad.

    I mean, it’s not like there is wage inflation, full employment and heated investment in the US creating more jobs than there are people to fill those jobs, and driving up wages even further.

    The inflation we see is largely driven by money creation in the fictitous capital markets that is used to speculate on oil and commodities and curency markets, and cartel pricing practices in oil, food and pharma industries. Crack down on the speculation, increase margin requirements, break up the cartels, and inflation will be reduced.

    Increase interest rates in a Volcker like manner will lead to the US being unable to service it’s debt, hyperinflation, a world currency, and the end of America as a world power. We will end up looking more like Mexico, which probably serves the purposes of the globalists who want to merge us in the NAU.

  19. rj commented on Jun 25

    Does anyone think “the lone dissenter” is a bit staged? By not having it unanimous, it gives them more wiggle room and the impression there’s a serious discussion on tightening instead of just staying still being rubber stamped?

    Also, why is there always just one dissenter? You notice there’s never 2 or 3? The law of crowds state that a person is more likely to object to group consensus if someone accompanies him because no one wants to face a knife alone, so seeing as the dissent over the past couple years is always just one and only one, it just strikes me as odd.

  20. rj commented on Jun 25

    “Crack down on the speculation, increase margin requirements, break up the cartels, and inflation will be reduced.”

    So you think that if the entire derivatives market disappears, inflation will be reduced?

  21. phil commented on Jun 25

    In agreement with the very first post listed, why should the Fed’s do anything at all? They’re collecting a cool 500 billion in interest from the money they create out of thin air and lend to the government that gave them the privelege(right?)to do so in the early 1900’s.

    What bothers me is that no one is asking the real question as to why we still have an anachronistic socialistic institution with a circa 19th century business plan that has been able to unconstitionally control the money supply exist at all. Here’s where I have to admit ignorance though in that I haven’t studied this enough to no what to replace it with but that doesn’t mean that I don’t know if someone has gangrene in their leg, it needs to be cut off. Gross analogy but accurate.

    Phil-Las Vegas

  22. Farmera1 commented on Jun 25

    “John aka farmera1 question for you – what would a bushel of corn or soybeans be worth without oil as a production helper?”

    If you meant what would corn be worth if all production for all farmers was made without oil,I really don’t know but it is safe to say there would be a lot less production (and probably a much higher price ) than there is today. As a rough estimate production/acre would be cut 30-50% and the labor content/bushel would go up several (maybe 10) times. And that means a lot of hungry consumers or a least a lot fewer meat eaters.

    If you meant what would corn be worth if a few farmers produced corn without petroleum/hydrocarbon inputs , the answer is what ever the local market price of corn is. The Amish (several Amish live within 2 miles of my home) essentially produce corn with
    very limited oil based help. They farm with horses, use mainly manure for fertilizer and seldom used herbacides. So they basically produce corn/soybeans without significant oil inputs, but due to the labor demands they farm much smaller farms. When they sell their corn/SB they take it to an elevator and get the same price as anyone else,although usually they feed the corn to either the horeses, cows or chickens so as far as I know they don’t sell much corn/SB. Essentially they farm much like all US farmers did in say 1900-1920s.

    It was a simpler time, but oh so much harder work. Lots of manual labor, small farms, and large families where kids were a real economic asset for the “free” labor.

    Hope this answers your question.

  23. Greg0658 commented on Jun 25

    Farmera1 thank you for that response … it got me wondering on the Amish – which is correct?

    1> the Amish are considered a religion or an ancient tribe and pay no property taxes
    or
    2> they pay property taxes and is one reason why they need furniture and farmers market sales

    another question … do the Amish do well not playing the American or world race, such as the rest of us?

    The temptation of the children of what they are missing is another story, kinda like, but not the same as rural flight.

  24. Eric Davis commented on Jun 25

    The thing I noticed today, and that I find amusing.

    for all their talk of “clear communication”.
    With the talk a few weeks ago about “Strong Dollar” and Inflation, Then Rolling over about it 24 hours later. Now with this statement…

    I realize, they have gone back to Green-speak.

  25. alex commented on Jun 25

    Larrybob…what commodities have cratered?Corn, Wheat, Sugar,Soy Beans,Palm Oil, gold, silver,uranium,Oil, NatGas…which ones?

  26. ben commented on Jun 25

    Not sure if this is the right place to ask the question but did anyone else see the recent post by Doug Kass on thestreet.com.

    He’s buying banks and shorting oil and discussed the possibility of $100 oil in the second half and a fed ease???

    I’m not sure I understand. Any thoughts?

    Barry?

  27. pft commented on Jun 25

    rj asks “So you think that if the entire derivatives market disappears, inflation will be reduced?”

    I think if oil and food prices are controlled by breaking up the cartels and eliminating speculation from those who never take delivery, there will be no inflation. And if that means some fictitous capital that was created out of thin air disappears, so be it.

  28. Troy commented on Jun 26

    The labor theory of value is crap; it is only a floor for prices of goods.

    Now that production has peaked prices will float upwards to another labor theory of value, but on the buyer not seller. How much money — labor — is that car ride worth to you?

    Gasoline will still a bargain at $10/gallon, compared to walking or taking the bus.

    Alternative fuels &c will serve to fill in for declining mainline production, but the mainline producers will charge what the market will bear and the up & coming new sources will have no economic reason to undercut that.

  29. farmera1 commented on Jun 26

    The Amish are a religion and in my State they pay property taxes on their homes/farms.

    They often buy land with cash, so in some sense they are doing just fine. But they live much differently than we do. Often before a young man gets married he works in a factory, lives at home and turns his money over to his father. Then when the young man gets married the father purchases the land, and builds a home.

    I admire the Amish, but wouldn’t want to live the way they do. I grew up on a small dairy farm in Iowa and by 18 years of age, I had all the hard work I necessary for a life time.

    Amish are mostly good hard working honest people and fun to be around, JMHO.

  30. rj commented on Jun 26

    “I think if oil and food prices are controlled by breaking up the cartels and eliminating speculation from those who never take delivery”

    NEWSFLASH: Nearly everything in this world is ran by an oligarchy/cartel.

    So let’s get rid of the stock market while we’re at it. If a person never takes a single dividend from a company, just buys a stock and sells it a couple weeks later, they’re really doing nothing but speculating right?

    No one will ever convince me I’m wrong on this. You cannot say a person buying a future on the commodity market is wrong if you believe free markets are the way to go. Period.

  31. Kaleberg commented on Jun 26

    “Dove or hawk?

    We’ll find out who the real Bernanke is after November 4th.”

    The question is actually “Republican or Democrat?”, and the answer is obvious. The Fed is Republican. They will not raise interest rates on a Republican president.

    If Obama wins, we’ll see sudden concern with the horrors of inflation, even if prices have stopped rising or even declined a bit. Remember all the “inflation” under Clinton? Modern inflation has nothing to do with prices. It’s the R or D in the presidential party.

    If McCain wins, we’ll see continued concern with the fragile economy and flat or declining rates. Economists will declare the recession over, or even averted. Wages and income will continue to decline as prices and productivity rise. Modern economic growth has nothing to do with the economy. Once again, it’s the R or D in the presidential party.

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