Recent comment by Fed Vice Chair Donald Kohn:

If longer-term inflation expectations were to become unmoored–whether because of a protracted period of elevated headline inflation or because the public misinterpreted the recent substantial policy easing as suggesting that monetary policy makers had a greater tolerance for inflation than previously thought–then I believe that we would be facing a more serious situation.

This could be telling. It hasn’t been said before by any FOMC member, and it was voluntary, in that no one asked the question.

It is something he is trying to communicate.

The FOMC sees inflation expectations showing signs of elevating, and is wondering whether it is at least partially responsible.

Their ‘theory’ had told them there was an inflation price to pay for cutting into a triple negative supply shock if it went so far as to allow inflation expectations to accelerate.

Credit spreads are in substantially from the wides, GDP isn’t collapsing and forecasts are for modest improvements.

Fiscal rebates are kicking in, being spent, and supporting prices.

Inflation is ripping, and now has the full attention of the FOMC.

Oil 130+

Dollar down

Stocks down a touch

Interest rates up a touch

2 Responses

  1. How can they not notice what’s going on in commodities? This cat’s long ago out of the bag, and they’re trying to talk commodities players out of the market as if the Fed is confidently under control and perfectly capable of stepping all over what Kohn is implying is nothing but a fantasy inflation trade.


    There. I called it.

    This talk used to move the markets under Greenspan, but its seems fairly transparent to me, and increasingly to others. The more recent threats from Lieberman and crew seem to have more teeth, but that implies sending those hedging commodities thoroughly offshore, which in and of itself implies capital controls.

    The Fed simply can’t fight inflation at this point given so much of it is the consequence of past sins meeting head on a consumer that is cash strapped or half insolvent. As for the banking community, the Fed’s swapping their useless assets for AAA treasuries. Implied: how on earth can we restore the assets backing these things to par so the leverage used doesn’t cascade into the credit default swap market and threaten to swamp JP Morgan again and send a daisy chain of defaults through Wall Street? (since they’ve so graciously written 40%+ CDSs)

    Problem is they’re attempting to kill the price discovery of the paper that’s behind CA housing that’s being priced some $160k off the median high of $580k at the bubble peak. They’re attempting to float the paper behind empty $3 million Miami condos that won’t sell at $2.25m. Its a shell game, and they know it, and the market is waking up to it and looking at commodities. So far we’re just dealing with past sins — the Ms all up 5x since 1980. Pretty soon the AAA Treasury Swap game will require additional M boosts, and look out below for the old USD.

    Anyhoo, nice blog. Lovely island you’re working from. Been a few times — what a great idea to move shop!

  2. not to mention inflation, output, and employment aren’t functions of interest rates in the first place in the direction they profess.

    rate cuts never have done anything but shift income between borrowers and savers. it’s always fiscal adjustments that make the difference.

    look for the pundits to say most of the coming agg demand/support for gdp and higher inflation is coming from last year’s interest rate cuts rather than from the tax rebates, for example.

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