The press went wild and crazy recently when the Fed announced a new and radical policy change. Sometimes I just don’t understand these people. The story has two parts.
First, the Fed is now very concerned that inflation is not high enough. They most definitely want it to reach 2%. Second, they say they are going to tolerate inflation going above 2%.
It makes me think of a powerful and omniscient Fed that can wield
its many policy tools so as to manage this lazy inflation kid.
So I digitally went to my friend, Fred, the data analysis
tool at the St. Louis Fed. There I was able to download enough inflation data
to gag a goose at Green Lake. https://fred.stlouisfed.org/series/CPIAUCSL#
I graphed (not here) what is called the Consumer Price Index (CPI) from
before the Tuna was born to now.
This was data for every month
from February 1947 to July of 2020.
I was able to get a transformation –
the annualized percentage change from one month to the next. That’s good
for comparison purposes.
I looked at the graph and it made my
stomach sick. So many ups and downs!
So I downloaded the data into an Excel file and looked
at the numbers.
What did I find? I found a pattern in
the inflation rates that resembled Peter Wachtel after his usual two-bottle liquid dinner in Marietta.
Main conclusion? If the Fed was trying to predict or control
Peter, then they are going to have their hands full.
For example, in the 12 months between August 2019 and July
2020:
The CPI rose
in 9 months, but declined in 3 months.
The biggest
one-month decline was April 2020 when it fell by 9%.
The biggest
one-month increase was the 7.3% increase in August of 2020.
The average
monthly rate over those 12 months was 1.1%
I’m not sure what the Fed would say about all that monthly
variability, but it might say, “See Larry, inflation averaged only 1.1%.” We
must mount our hefty steed and push it faster. Clearly if the goal is 2% and it
increased by only 1.1%, then Mr Powell would be in a dither. Imagine that you
were hoping to make $2 at a craps table and you only got $1.10. What a gigantic
humiliation.
But that’s not the whole story. This little table shows you
some of the other years.
2020 1.1%
2019 1.8%
2018 2.9%
2017 1.8%
2016 0.9%
Are they keeping 2018 a secret? Were they excited and happy
in 2018 when they got inflation (2.9%) well above their 2% goal?
What if you averaged the last three years and found that for
the last three years inflation averaged about 1.9% per year?
1.9% seems pretty close to 2% to me. I guess that’s
irrelevant.
Despite inflation of 1.9% over the last three years the Fed
had to make a major announcement that inflation is tool low and that they
needed to make a major historical change in their targeting.
And the press lapped it up like a huge chocolate milk shake
in September.
Please tell me what is wrong with these people?
Okay, I will take a shot at that question.
What is wrong is that they aren’t honest with us. They think
we are stupid and they think we will believe the Fed and the press and we will
give them kudos and honorary awards for wonderfully controlling our economy. No kid goes away without a medal to pin on his or her chest.
The truth is that the Fed doesn’t care a wit about inflation.
Inflation is a way to take our eye off the ball. The ball is the goal to always
be pressing on the accelerator pedal. The Fed’s goal is to always be trying to
get demand in the economy to grow faster. Their goal is for that increased
demand to reduce the unemployment rate.
Why can’t they just admit that? Why can’t they say they have
only one policy target? Since I have been so brilliant today, I will let you
reply and tell me why you think the Fed would rather distract us with
meaningless inflation data than just tell us what they are really trying to do
when they keep interest rates at roughly zero for infinity.
Dear LSD. Yer commentary sails like a fly’n fish way over the headz of most folks ‘cuz they’re more interested in dodg’n non-mask wear’n CV-19 candidates and watch’n reruns of Beaver, Lucy, Hazel, Rin-Tin-Tin, Fort Apache, Oz/Harriet, Gilligan’s Island, The Jim Dooly Fish’n Club, and Jeopardy. Unlike you they simply don’t unnerstand the inner workings and hidden mechanisms of the Fed and prefer less heady and more laugh-track stuff. But even if they do know wut lurkz under the Fed’s hood there’s weally weally nutt’n they—or you—could do ‘bout it. And even if they—or you-- want to put the Fed genie back in its boddle id have little or no effect on right’n the list’n Good Ship USA and gitt’n it back on a beneficial, less turbulent, economic course. Too much other stuff blow’n the Good Ship USA 'round 'n 'round. I think you git my, er, drift.
ReplyDeleteMe thinkz folkz like Peter Wachtel and yerz twooly wanna sit back and let CV-19, (non-violent) riots ‘n mayhem (ahem . . . ), political attack adz, political D.C. dysfunction, ‘n laugh track reruns run their course ‘n git back to doing our duty to resuscitate sagg’n beer ‘n wine sales. Mr. Wachtel needz to up his game from a two-boddle dinner to three: It’s the patriotic thing to do, eh?
Right on Tuna. As usual you swim in the best waters. As for Peter W. I am sure he will try to move up to three. As for topic choice, I do love to go after the Fed, especially since it is so lame these days. I understand that many of my faithful readers don't love that topic but I figure its a blessing -- they either get a week off or they get a nice nap. Always nice to hear from the Tuna!
DeleteBanks and a flurry of new lending brokers are begging people to take advantage or the very low low rate. I did and was.....now capable of paying off a a 20 year mortgage in 15 years.....cash out a large amount to pay off other high interest bills. I am sure a lot of people are doing this. In Florida we have a housing boom....another one...yup. Last one died a quick death in 2007. This one is the tail end of the boomers getting out of the city. You guys figure it out. What happens next?
ReplyDeleteSo you are saying it is the Fed's goal to help people restructure loans and use the proceeds to pay off other loans while simultaneously impoverishing people who earn income through interest rates?
ReplyDeleteInteresting stat about Florida. I guess while Florida was booming in the second quarter the nation's residential construction fell by 38%. A look at real estate by State in the first quarter shows it declined in almost every state including Florida. It rose marginally in Washington, Oregon and a few other far western states. Hmmm...so much for low interest rates and housing. I kinda think the Fed ought to stick to it's charter rather than sticking its nose in every nook and cranny.
The housing boom has been going on here since June. I personally know a few realtors who are over joyed. So depending what quarter one is in, yes the Feds are doing exactly what you said. Meanwhile my IRA savings have dropped a little as the market sways back and forth and I am in conservatives offerings.
ReplyDeleteCheck the third quarter in October.
ReplyDeleteI will check for sure but my main point remains -- the Fed's job is not to stimulate housing in Florida or anywhere else -- it's main job is not to redistribute wealth by virtue of whether or not you are a lender or a borrower.
DeleteDoober: Check your history. The FED has very often been a shill for the administration. Even Burns. And the administration always likes low(er) interest rates.
ReplyDeleteDr. Mic
Thanks Dr. Mic. Last I recall the Fed is an independent agent. Except for something a while ago called The Accord, unless you have top secret phone records you cannot know what caused the Fed to appear to act as the government's agent. Even now -- Trump loves low rates as you say -- but that doesn't mean he is the reason the goons at the Fed decided to keep rates low until Hell freezes over.
DeleteMy dear Uncle Larry old chap!
ReplyDeleteDon't expect any macroeconomic insights from your old Sanibel Engineer buddy but a little cross fertilisation between your profession and mine might be in order.
Let's take for example your concern with the Fed over-goosing the economy... isn't that what you're alluding to with economic terminology like stimulus, inflation and such? There's no doubt that inflation and stimulus are related.
Take oversized boob jobs for example, and their economic consequences. But I digress. Among other things your dissertation brought to my engineering mind was one of the earliest recipients of the coveted Darwin Award. The Awardee had strapped two JATO rockets (3,000 lb. thrust each) to his 3100lb. 1967 Oldsmobile Cutlass for a speed trial in the Nevada desert. His and the Oldsmobil's remains were found 200 ft. up a cliff face with the brakes still fully applied.
Let's hope the Feds don't use JATOs to goose the economy.
Stay well, keep your head down and wear your mask until the smoke clears.
Cheers
Mike
Nice to hear from you Monsieur Mccray. While engineering lessons involving rockets are always appreciated in this hallowed and humble blog. I can say that I know a few Green Lake geese who might be offended by your use of the word goose but I won't dwell on that offense today. I will say that the Fed has to date already unloaded a trillion tons (or was that dollars?) of rocket fuel and this could make them eligible for the Darwin Award. Please give my best to brothers and sisters of Sanibel.
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