While we are drifting into the weekend with limited excitement on the data front it was interesting to see how some market participants got over-exited (which is never a good thing for whatever reason) about the revisions of the Fed’s dot forecasts while the irony about the whole thing is that there are indications the FOMC itself seems to regret ever having started to publish these forecasts, so the reverence with which they were received is perhaps a little bit misplaced.
Anyway, there is more value in the Fed’s overall policy statement.
Really interesting is inflation is at least back to the extent that the Fed believes it should be closely monitoring developments in prices.
In the FOMC statement
we read: “The Committee continues to monitor inflation developments closely … will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations…”
And yes, this is a new emphasis. Inflation has been an aspiration hereto to a target that the Fed had to reiterate it would reach, but now it seems it has become a more meaningful focus.
The legitimate question this raises is if this is relevant.
It’s a fact the core measure of consumer price inflation,
which gives the best indication of where we are heading overall came in at 2.33 percent year-on-year (y/y), which was well above its average since 2000.
The inexorable rise (trend) in core inflation over the course of the past year or more strongly suggest underlying inflation pressures continue to build. It’s also a fact that over 4 percent of the core CPI basket is also oil embedded into prices of other products and the fall in oil prices has been overwhelmed in the underlying inflation story.
The whole situation allows the Fed, at least so far, a little bit room to maneuver and keep its dovish stance with all what this implies and which could be described as an overall one-way bet.
Time will tell if the Fed made the right choice by postponing normalization of its monetary policy when the facts confirmed clear signs of rising underlying inflation.
Today we get the Michigan consumer sentiment figures about which investors could do well not to overlook the fact that sentiment data is subject to media influence as much if not more than it is subject to what is actually happening in the real world.
However, and which is probable more important is that the focus of the media on the political circus at the moment, and which raises some interesting questions as the tone of the U.S. presidential campaign to date has been more stressing than negative than the positive that may bias the reported sentiment of consumers.
At the same time, and this is important to investors who got confused about what’s going in the markets as nothing of the fundamentals have changed recently.
I's certainly not an overstatement to say the political focus has subsumed economic facts with their usual noise from market volatility, and perhaps have lessened market volatility as an influence and that has translated into the VIX (volatility index)
that has come down to what we could call the “don’t worry, be happy” zone.
If that will endure is another question.
Finally, we also will get the Atlanta Fed’s Business Inflation Expectations.
To investors it cannot be stressed enough, at least that's how I think about it; inflation expectations are about as meaningless a statistic as it is ever possible to come to up while the predictive power of expectations when it comes to inflation is practically zero.
Of course, central bankers talk about inflation expectations as factors influencing policy and often use inflation expectations as a fig leaf as justification to cover up their true policy objectives.
Yes, it becomes really very hard to continue having full faith in our central bankers.
Etienne "Hans" Parisis
is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.
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