Guest post by Jeffrey Snider, Alhambra
St. Louis Fed President James Bullard has become something of a spectacle in the past year or so. As the FOMC claims to be data dependent upon its on schedule for ending ZIRP, Bullard’s interjecting media appearances seem to straddle either side, the exact which he takes being dependent on maybe not data but at least markets. While stocks seem to have figured prominently via his seeming tipping point back and forth, there can’t be any denying market-based inflation trading and measures as an equivalent piece.
The recovery story itself is down to almost that point exclusively. There is nothing left of the current economic story by which to suggest that mainstream view of data dependence. What the FOMC has tried to do is replace current conditions with an “anchored” future, so certain because, they claim, inflation expectations are only there. Everything else is supposed to follow that one last assumption.
A top Federal Reserve official stuck to his forecast of raising interest rates in the first quarter of next year, with rebounding inflation, strong jobs data and lower oil prices propelling a strengthening U.S. economy.
The problem with going “all in” on long-term inflation expectations is revealed in the quote above, not for the paraphrased words from President Bullard but rather how they were expressed in November 2014. Yes, “transitory” and all that falling apart, but there is deeper and more significant erosion here that is really conditional in tearing asunder the “transitory” fantasy.
It starts with TIPS trading and how that view of “inflation expectations” has been altered, or at the very least evolved. This is a greatly underappreciated facet of this period, so much so that I’m almost certain it is wholly unappreciated. This change is obvious when viewed, like most economic and market accounts, in longer term context.
