The Inflation-Fighting Fed

We here at Running of the Bulls are trusting people.  We know that our elected officials and their appointed representatives always tell us the truth.  Why would they not?  What would a government official have to gain by not being straightforward with the 300 million citizens of this fine country?  Therefore, when a government official speaks to us, we believe them.

Being government officials, we extend this same credulity to FOMC members. So when the Fed tells us they are concerned about inflation, we know they are serious. 

And the FOMC is serious about inflation, I'll tell you, man.

This is what the FOMC had to say about inflation on September 18 when the Fed cut the funds rate 25 bps (basis points, 1/100th of a percent).

Readings on core inflation have improved modestly this year.  However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.  [Emphasis added in bold red throughout]

See?  See?  Inflation risks remain.  And the Fed would remain vigilant guarding against the hidden ravages of inflation!

At that time, inflation readings were as follows.

CPI (consumer price index)  2.3%
PPI (producer price index)  2.3%
PCE (personal consumption expenditure) deflator  2.5%
Gold $714

Don't believe me?  Well, let's see what our heroes had to say about inflation at their next meeting on October 31 when the FOMC cut by another 25 bps.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

And how were the inflation readings doing?

CPI  3.5%
PPI  6.1%
PCE deflator  3.0%
Gold  $790

Okay, they ticked up a little, but that's just bad luck.  The Fed is on the case, as they said on December 11 when they cut another 25 bps.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

And inflation?

CPI  4.1%
PPI  6.3%
PCE deflator  3.6%
Gold  $811

Well, okay, I guess. 

Anyways, they said they watching inflation on January 22 when they cut by 75 basis points in an emergency meeting, and I feel good about that!

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

CPI  4.3%
PPI  7.4%
PCE deflator  3.7%
Gold  $893

Er, guys...

They said the same thing on January 30 at the regularly scheduled FOMC meeting when the funds rate was cut by 50 bps.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

CPI  4.3%
PPI  7.4%
PCE deflator  3.7%
Gold  $921

In the gold market, when the price gets bigger, does that mean gold is getting less expensive?

In the release following the last meeting on March 18 when rates were cut another 75 bps, FOMC members stated

Inflation has been elevated, and some indicators of inflation expectations have risen.  The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.  Still, uncertainty about the inflation outlook has increased.  It will be necessary to continue to monitor inflation developments carefully.

CPI  4.0%
PPI  6.4%
PCE deflator  3.7%
Gold  $1004

It comforts me knowing the Fed is watching inflation.

By the way, has anyone seen my wallet?  I had it here just a second ago.

Gold cracked this week.  One reason given is because the Fed did not cut 100 basis points.  Now, the funds rate is 2.25%.  The futures market is expecting the Fed to cut 25 bps at the next meeting in April and again in June, taking the target to 1.75%.  Meanwhile, charge-offs for credit cards, auto loans, home equity loans, Alt-A mortgages, option ARMs, prime mortgages, commercial real estate and commercial and industrial loans have just begun, not  to mention that the $600 bonus checks the government will be sending us arrive soon.  I guess there won't be any more liquidity and gold has topped then.

Or maybe not.

Comments

[Running Amok In Fantasyland]

Great stuff, Toro. A lot of work went into that and the result was magnifico!

Gold (and the Ags) also cracked when the CPI came in at 0%, which gave commodity bears an open shot.

Interesting that a lot of solid names who went long gold 7-8 yrs ago have sold their positions recently (Gary Halbert of Profutures) or are announcing they will soon (BCA this week).

Lots of contrary indicators: Here Come The 70s! Peak Oil! Peak Ag! End Of Wall Street! End of America!

So what's the next hot sector in the next up cycle? Could it possibly be...TECHNOLOGY?

PHARMA?

Let's see, what's been down the longest that absolutely nobody cares about...?

[enjoyingmylife]

Agreed: thoughtful and well-written. I'd even say funny, if only it wasn't so sad.

Speaking of the Fed, curious if you have an opinion on Roubini's latest, specifically his prescription for avoiding a meltdown via massive OVERT government assumption of mortages. Too much socialism, or the best worst option?

[ydengxp]

This is not directly related, but whenever we're talking about inflation, we're, of course, referring to commodities and energy. I know that you were shorting emerging markets (not sure if you've covered your position in light of the recent declines in the Chinese and Indian markets). I'd like to get your opinion about Brazil. It is the B in BRIC. It is big in commodities. If you notice, the Brazilian stock index hasn't been down that much compared to that of China and India. Do you think the recent price decline in commodity and energy prices will continue in the near future? If so, do you expect Brazil to go down as well? Would you short EWZ?

[Toro]

I'm not sure directly about Brazil.

I would like to stress that my short position in emerging markets is predicated on a financial event, not an economic event. I am very bullish long-term on emerging markets. I am not expecting the BRIC countries to go into a recession. They might, I don't know, but I'm just not expecting it.

My belief is that risk is being repriced, and that will hit - or is hitting now - emerging market stocks and bonds.

I also think that sometime in the next month or two, the next leg - up or down - will reveal itself in emerging markets.

[hector rivera]

Excellent post

[Dan]

Great stuff Toro!! I feel FED is doing a good job.

Dan
http://www.perfectmortgagelender.com/