In an article published today by CNBC, Kocherlakota says he doesn’t see inflation rising above 2% until 2018. Terming any FOMC meeting in 2015 which the Fed funds rate would rise as inappropriate.
This sluggish inflation outlook implies that, at any FOMC meeting held during 2015, inflation would be expected to be below 2 percent over the following two years,” Kocherlakota said in remarks prepared for delivery to the Rapid City Economic Development/Black Hills Knowledge Network Forum. “It would be inappropriate for the FOMC to raise the target range for the fed funds rate at any such meeting.
The Fed has kept rates near zero since December 2008 and bought trillions of dollars of Treasuries and housing-backed securities to push down borrowing costs and pull the economy free from the effects of the Great Recession. But so far, Kocherlakota said, “monetary policy has proven to be insufficiently accommodative to offset either the price or employment effects of this large shock.
To make its policies more effective, Kocherlakota argued, the Fed should impose a two-year horizon on its 2-percent inflation goal, and make it clear that it is just as concerned about inflation running below target as it is about inflation overshooting.
The Fed should consider incorporating those changes into a policy framework that was first articulated in January 2012, he said.
Just for giggles, I want to take a look at raw TIPS to see about where we are.
Term TIPS Treasury
5-yr -0.14 1.56
10-yr 0.34 2.32
So, the markets are saying that Kocherlakota is off the mark by about 7 years.
And here’s another interesting factoid from Bloomberg’s US Treasury Market page. The current effective FF rate is 0.08 % with the target being 0.25%. One would think that it might be better to have the effective rate at least hit the target rate before trying to raise it, unless, of course, the FOMC feels like going back to ZLB in a hurry. Additionally, the Cleveland Fed is still showing market rates are ~2% in the negative.
All in all, the indicators I’ve looked at support Kocherlakota’s argument that raising the FF rate any time before 2018 would be inappropriate. Though, I think that 5 year TIPS might have the inappropriate rate hike priced in, as it’s going the wrong way, leading me to think that a better word than “inappropriate” might be “counterproductive”. At least the TIPS market is telling the FOMC that Kocherlakota is correct. Will it heed the warning? I certainly hope so.
I’m curious about what is it that proponents of a rate hike are saying about why the FF rate needs to be raised. Well, for one example I choked on some video material from the WSJ’s Channel on my Apple TV today; and the argument there was that the headline unemployment rate is down and we’re creating 200K+ jobs per month. Job growth feeds wage growth, and that feeds into inflation growth.
Isn’t that sort of the same argument against QE, that if people get jobs, then the ultra-low inflation turns into low inflation or, heaven forbid, maybe slightly above target inflation? I just don’t understand that argument. Maybe I am just slow. Someone is going to have to walk me through it in a way that I can catch the golden thread of logic because I just don’t see it or understand why I should be afraid of people who need a job getting them. For some strange reason this argument, or perhaps just an evolution of the inflation nutter paranoia propaganda, isn’t showing up in the TIPS market or anywhere else. While they’re imagining things that aren’t there, perhaps they should take a stab at imagining why the TIPS market doesn’t agree with them.
And at the risk of flipping on the rant switch, this controversy and manner of policymaking is so sad as to be beyond belief that anyone would revel in, let alone accept, a policy that says in order to maintain below target inflation we have to maintain a hearty sacrifice ratio. No, it’s beyond sad. It’s appalling and needs to go.