The biggest challenge for the Federal Reserve in 2015 is going to be trying to convince everyone that it is meeting its dual mandate. That is true of every year, but this one is unique given the threats to undo ZIRP after more than six years of it. On the one hand, there is the “maximum employment” mandate seemingly arrived as millions continue to stay out of the “booming” payroll expansion. However, the “inflation” mandate (as that is what it is, it is nothing to do with stability as you can’t have a “little” instability just as you can’t be a “little” pregnant) is getting more and more away from them. FOMC members continue to say all the “right” things about being able to meet their 2% target, but they haven’t done so since so conspicuously since 2012.
Fed Chair Janet Yellen and her colleagues probably will face a communications challenge as they pave the way for the central bank’s first interest-rate increase since 2006. Policy makers have said they believe the plunge in fuel prices will prove temporary, which will be more difficult to substantiate as inflation gauges keep sliding six months from now.
In other words, it is much more than a “communications challenge” as this primary metric (for them) does the opposite of what they say is going to happen. Even Bloomberg, in the article linked above, provides a helpful graphic about how the Fed has failed in that objective. It’s almost as if “something” happened in 2012 that has yet to let loose of the economy; an obvious and evident occurrence that is totally unrecognized at any official level as if it were simple random chance.
They said six months ago that inflation would pick up, instead the price declines most evident in energy have now expanded and exploded:
The Dallas measure featured the biggest one-month drop in goods prices excluding food and fuel in data dating back to 1977, according to the report. It was “fairly broad-based” with clothing and footwear, furnishings and household durable equipment, and recreational goods and vehicles all showing price declines of about 10 percent at an annualized rate, senior economist Jim Dolmas wrote.
So much, once again, for Black Friday being an anomaly of changing consumer preferences. It seems as if it is “unexpectedly” much deeper than that as yet again we see where the economy is not living up to the hype being carefully provided by the FOMC and duly parroted unflinchingly almost everywhere in the media. The economy is booming but it isn’t acting like it anywhere.
If you actually look at commodity prices, there is much more than any sense of “inflation” in the trajectory. In other words, on prices that actually physically clear supply against demand there is nothing to suggest an increase in usage; quite the opposite only over a longer period. That trend goes back to 2011 in a preview of the broad, global slowdown that occurred all across the globe.
Energy “is going to be pushing down headline inflation and may even spill over to some extent to core inflation,” Yellen said in a Dec. 17 news conference after the central bank’s policy meeting. “But at this point, although we indicated we’re monitoring inflation developments carefully, we see these developments as transitory.”
Instead, the “booming” economy to which she is relying may not be much more than a figment of mini-cycles being measured and counted the same as other growth periods due to flawed economic theory. In terms of commodity prices again, we see that there is a much defined yearly pattern in 2013 that was repeated in 2014.
That would seem to suggest that the mid-year “jump” in GDP driving perceptions of a sustainable recovery may be just as false and fleeting as those of 2013 (expressed almost exactly in the same terms). So what we see is an unstable situation where the economy (both in the US and globally) starts and stops. That itself is a miserable proposition especially when taken in context of the as-yet unresolved 2012 slowdown, suggesting not economic progress but the far more destructive attrition most evident in the lack of income.
Even Alan Greenspan has taken to recognizing fundamental truth about these so-called economic gains (which is shocking in that it can only be his determined effort to undo what will surely be history’s unkind judgment).
“Almost all of the weakness in the last four, five, six years has been in long-lived investments” in capital goods and real estate, Greenspan said. “Until these pick up, we’re not going to get the kind of vibrant growth that everyone is hoping for.”
That would actually explain this mini-cycle event that has occurred for two consecutive years. Economic agents going about setting production and ordering protocols are influenced, and much more highly than you might think, by economic expectations set by mainstream assessments like the Blue Chip Economic Survey. Each year, in a fit of similar optimism, the mainstream forecasts are exceedingly robust which is carried out in actual activity. Except in 2012, the year-end did not occur as it was supposed to, leading to excessive weakness and overhang heading into 2013 (blamed, of course, on the weather). Rinse, repeat, leaving economists to have to explain why it didn’t happen but will happen.
That is no condition by which “long-lived investments” will flourish, as it amounts to another form of financial-driven instability (amplified, certainly, by monetarism’s penchant for heavily skewing and screwing corporate allocation toward the financial).
The real problem is that commodity prices, particularly crude, are already much lower now than where they were at the same point in the mini-cycle last year. That could mean that the mini-cycles have been compressed in terms of months (which I doubt since the Christmas season is most relevant to it), or it could mean, as in crude, that this mini-cycle downslope could be even more severe than either of the last two. The danger at that point, in contrast to 2013 and 2014, is that the economy may not be able to convert into the next mini-cycle, instead experiencing too much atrophy in which to shake off.
That seems, to me, to be the message of crude prices, the yield curve and even “dollar” funding. The worries are that there is much more than a non-trivial chance that as the economy falls off again at the end of this year it may not get back up for next year. So as much as the FOMC gropes for solutions to “communication challenges” they really have far greater problems right in front of them. Unlike Greenspan, I seriously doubt any of them will have a similar “religious” conversion in which to see the world and the world economy as it actually is outside the spreadsheets and regressions. It’s not like the Bank of Japan has a lock on being blatantly backwards all the time.