Weekend Miscellany

August 29th, 2015 5:00 pm | by John Jansen |

Stephen Stanley of Amherst Pierpont Securities has an interesting note which discusses inflation and then separately the state of Fed policy:

1)      Core inflation.  I have discussed the fact that the core PCE deflator has run unusually low relative to the core CPI and other measures of underlying inflation.  A few hours after the release this morning, the Dallas Fed put out its Trimmed Mean PCE figures.  There are couple of things to note.  First, the monthly advance was 0.11% instead of the 0.07% rise recorded for the core gauge, indicating that the downside surprise was fairly narrowly concentrated, though it was still a legitimately soft result.  In fact, the one-month annualized increases had been at or above 2.0% for five straight months until July.  Second, the six-month annualized advance accelerated from +1.9% to +2.0%, the highest reading since the spring of 2012 and of course in line with the Fed’s target.  In contrast, the 12-month increase slipped, consistent with the core PCE deflator, though from a higher level, from 1.66% to 1.62%.  As you can see, these numbers are broadly much closer to the 2% mark than the core PCE deflator numbers that get all of the headlines.  The Dallas Fed trimmed mean numbers are worth noting because the FOMC minutes have cited them several times and a number of Fed officials have noted that they view this gauge as a better read on underlying inflation than the more popular core PCE numbers.

2)      Fed chatter.  With many Fed officials out in Jackson Hole, today has seen a steady stream of policymakers making headlines by talking to TV, radio, and print media.  There are three takeaways in my view.  First, the hawks are still full steam ahead on September liftoff.  Both Bullard and Mester, who are hawks but not especially extreme, said that the recent market volatility was insufficient to change their support for a September rate rise.  George had suggested the same yesterday.  Second, the status quo ante was a September move.  Fischer noted that the case for September liftoff was “pretty strong” while Lockhart, echoing Dudley, said that he was “less resolute” about a move in September after the volatility.  I had noted Wednesday that I thought Dudley’s “less compelling” wording was a signal that September liftoff was more likely than generally thought until the market meltdown began.  As Fischer, Dudley, and others have made clear, the market volatility issue, while it seemed overwhelming a few days ago, could easily fade in importance before mid-September.  All in all, what we have heard out of Jackson Hole so far is very consistent with the stance that I took on Wednesday.  A September rate hike is still a very live option.  The economic data certainly support it, so only sustained and serious market trouble would delay liftoff.  Moreover, my third takeaway follows naturally from the second.  If the Fed delays a rate hike, it will most likely take the first available opportunity to go, i.e. as soon as the markets calm, we will see liftoff, even if that means moving at a non-press-conference meeting like October.  In short, market participants (and a number of Wall Street economists) probably overreacted to the spell of market swings seen recently in the degree to which they changed their outlook for monetary policy.  The reaction to VC Fischer’s comments represented a pretty hefty down payment on bringing us back to the status quo ante, but if markets continue to find their footing, there is probably more to go.

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