BarroMetrics Views: Whither FOMC II
As I expected. the FED left ‘considerable time’ in the statement. It is now a ‘reference, not a policy’. What does the mean? How have things changed by the FED changing its policy to ‘being patient’.
The FED took pains to state that the two phrases had the same intent. And when a rate hike would take place still depended on the data. As far as I can see, there change in language has made little difference to FED policy.
I should mention that some FED watchers have taken the view that rate hikes would begin mid-2015 (see http://www.ft.com/cms/s/0/d7652586-861e-11e4-b248-00144feabdc0.html#axzz3MDnUmxSQ). We’ll see.
In the meantime, the US$ and S&P, after some wild gyrations, apparently decided that the statement and subsequent comments by Yellen meant that the FED would not begin raising rates till late 2015 or early 2016 (see http://www.cnbc.com/id/102223871).
My view is: if we continue to see the AMB flow funds into the economy from the St Louis Fed, the resulting inflation rise will force the FED to raise rates sooner rather than later.
I draw your attention to ………the fact that the……
…..last night, the headline CPI showed a drop greater than consensus. So, why am drawing your attention to this - after all, low inflation means low rates, right?
Yep, but we need to look beyond the headline.
The drop in the headline rate was entirely due to the drop in oil prices. We know this because the core CPI rose 1% (slight greater than expected). Core CPI is the headline rate stripped of food and energy. With the food component being relatively stable, the changes in the headline had to be the oil drop.
In short, we are seeing core, creep inflation, inflation that will start to move quickly once oil bottoms; and that may not be too far away.