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Fed's Current Policy 'Hard to Justify' Amid Solid Economic Data

Fed's Current Policy 'Hard to Justify' Amid Solid Economic Data

Thursday, 12 April 2018 09:38 AM Current | Bio | Archive

The minutes of the Federal Reserve Open Market Committee (FOMC) meeting that were released yesterday showed confidence in future growth and inflation that fits comfortably with the idea of another three fed-funds rate increases this year, which would bring the fed-funds rate increases in total at 4 for 2018. 

As the minutes showed, the current monetary policy stance is “accommodative.”

It is really hard to justify an accommodative policy stance when you have full employment, at or above trend growth, and unnecessary deficit financed fiscal stimulus.

Even with the Fed hiking a quarter point so far this year, on a consumer price inflation basis, “real” fed funds will be around “zero” at the end of the year.

Admittedly, the Fed does not look at consumer price inflation (CPI) as its main measure of inflation, but financial markets do.

The U.S. consumer price inflation (CPI) data we got yesterday showed that the all items index rose 2.4 percent for the 12 months ending March, the largest 12-month increase since the period ending March 2017 and higher than the 1.6-percent average annual rate over the past 10 years. The index for all items less food and energy rose 2.1 percent, its largest 12-month increase since the period ending February 2017.

Yesterday’s released inflation numbers were just a reminder that last year’s CPI numbers have been weird. Remember how former Fed Chair Janet Yellen kept stressing inflation on the CPI measure was held down by temporary factors?

The ending of the “Verizon effect” has removed one of these problems, but there are still some other temporary factors at work.

The “Verizon effect” is an example of non-market prices influencing the inflation rate. Without any price actually changing, statistical adjustments meant that mobile phone prices dropped 17 percent on the year around this time in 2017.

On the whole issue of trade wars, the Federal Reserve regards the trade war as being more damaging to growth than inflationary overall. They are obviously raising consumption taxes by putting tariffs on goods, partially made in China, is an inflation shock in the very short term.

Meanwhile, the Chinese Ministry of Commerce (MOFCOM) has signaled that China’s President Xi’s speech earlier this week was not a concession to the United States and negotiations are not taking place with the United States at the moment.

The tone in the trade war keeps swinging backward and forward, but now, the Chinese are reinforcing a relatively strong line.

This noise is likely to continue for the foreseeable future and markets are increasingly likely to filter it out.

The risks of missile strikes against Syria is also something that markets are likely to filter out with perhaps some exceptions.

The increase in regional tensions has us led to additional problems for the Turkish lira, hitting an all-time record low on Monday of 4.1550 against the dollar, which represents a depreciation of 8.5 percent this year alone. The yield on the Turkish benchmark 10-year bond opened at 13.5 percent.

The oil price has moved a bit, but this is less likely to be affected by the “Syrian situation” over the longer term.

Generally, markets are inclined to ignore events like those in Syria.

An escalation of tensions between the United States and Russia may have a bearing if it generates fears of more sanctions against Russia or against Russian individuals.

Today, proper economic news is a little bit piecemeal.

There are a few central banker speakers including the Bank of England’s Governor Mark Carney, the German Bundesbank President and European Central Bank Governing Council member Jens Weidmann and Minneapolis Fed President Neel Kashkari, but markets are not especially uncertain about where the near-term direction of central bank policies stands at the moment. 

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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It is really hard to justify an accommodative policy stance when you have full employment, at or above trend growth and unnecessary deficit financed fiscal stimulus.
fed, policy, economy, data
Thursday, 12 April 2018 09:38 AM
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