A Pink Elephant and the Fed

Bloomberg's Peter Coy @petercoy has an excellent article on Fed policy worth a good look: Don’t Think About Pink Elephants or Tighter Monetary Policy

There really aren’t any hawks left on the FOMC,” only doves of different degrees, JPMorgan Chase & Co. Chief U.S. Economist Michael Feroli wrote to clients on Jan. 14, referring to the Federal Reserve’s Federal Open Market Committee. “Monetary accommodation” today is “far greater” than in past decades when the unemployment rate was as low as it is now—6.7% in December—Jim Paulsen, chief investment strategist of the Leuthold Group, wrote Jan. 14.

A hawkish Fed would be jacking up interest rates right now. The Fed might say, as Paulsen writes in his note to investors, that the yield on 10-year Treasury notes is only one-seventh what it was in December 1986, when the unemployment rate was the same.

“Now is not the time to be talking about exit” from bond-buying, Powell said. When the time does come, he said, “We’ll let the world know.

Powell not only opposes raising rates or cutting bond purchases; he’s against scheduling it, talking about it, or even thinking about it too much. That may be sensible advice, but to people in the financial markets who are getting uneasy about inflation, his lack of concern could make them more concerned. Powell is like the psychologist who tells you not to think about pink elephants. From that moment on, some people can’t think about anything else.

Ostriches, Doves, or Monkeys?

The Fed is like a cross between the "See No Evil" monkey and an Ostrich With it's Head in a Hole

Ostriches don't really hide their heads in the sand, they bury eggs in the sand. 

In contrast, the Fed sticks it head in the sand, planting seeds of inflation and cheerfully hopes the seeds sprout. 

Meanwhile, like a pack monkeys wearing blinders, no one on the Fed can spot the inflation already present. 

Look Ma, No CPI

Consumer Price Index Components YOY 2020-12 Detail

The Fed's head-in-the-sand rationale is likely based on the CPI. 

I noted CPI Rose 0.4% in December with Gasoline the Major Factor.

The Fed ignores gasoline and food. I won't quibble with that. But I will more than quibble with other things.

What About Housing?

The BLS does not directly include home prices in the CPI. The latest Case-Shiller home price index is up 8.4% as of the latest report which is for October.

Instead of using home prices, the BLS uses Owners' Equivalent Rent (OER).


Ask anyone looking to buy a home what inflation looks like.

Failure to properly account for housing has distorted the CPI continually from 1998 until now.

The Fed did not spot the housing bubble nor predict the Great Recession because it did not understand the asset inflation housing bubble.

What About Health Care?

CPI Medical Cared Services Year-Over-Year 2020-12

The BLS says the cost of medical care is up 15% from a year ago.

Ask anyone buying their own health care how accurate that is. Also ask anyone buying their own health care if it is only 6.97% of their budget as the BLS states.

Capital Expenses

I get the fact that the Fed and BLS consider housing a capital expense. And I understand Medical expenses are mostly paid by businesses, Medicare, and Medicaid, not "consumers".

But what about those who do not have insurance. Do we ignore the rising costs and simply average them in?

What are we trying to measure? Or are we really trying to hide, not measure?

What About Bubbles?

The stock market and risk tolerances are also a measure of inflation albeit difficult to measure. 

Add it all up and the CPI is nothing but a "head in the sand" measure of purported inflation and a very poor one at that.

Not to worry, “We’ll let the world know,” when we spot inflation says Powell who cannot see the big pink elephant standing right on the Fed's table.


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