Caught with his “pants down”!


One of the Federal Reserve‘s biggest inflation fighters confessed Friday he’s been caught off guard when he sees how calm price pressures have been in the face of epic levels of central bank stimulus.

Speaking in Philadelphia, Federal Reserve Bank of Richmond President Jeffrey Lacker said, “I have been surprised by the stability of inflation and inflation expectations.

Mr. Lacker has been a persistent critic of central bank efforts to drive up growth and lower unemployment via rock bottom interest rates and campaigns of bond buying. One of his most persistent concerns has been that Fed actions will drive up price pressure to levels considered unacceptable to the central bank. To that end, Mr. Lacker was a dissenter at monetary-policy-setting Federal Open Market Committee meetings when he last held a voting role in 2012.

But he shouldn´t, being a central banker and all. The charts show the behavior of two measures of inflation expectations (10year) and the Fed´s preferred inflation indicator, the PCE-Core.

Pants down_1

The following charts show what was going on with broad money supply growth (Divisia M3), NGDP and velocity growth. Note that in 2007, with the first indications of financial troubles, velocity falls (money demand increases). Money supply growth increased, offsetting the increase in money demand, with the result that NGDP growth was kept relatively steady

In early 2008, with velocity falling (negative growth) money supply growth falls strongly. The result could only be the steep fall in NGDP growth.

With QE1 velocity rises, more than offsetting the continued fall in money supply, so NGDP growth climbs. More recently, the fall in velocity is not adequately offset by an increase in money supply growth, so that NGDP growth falls back below 4%.

Pants down_2

In short,Jeffrey Lacker´s (and more generally the Fed´s) inflationphobia has been misplaced all along. The costs have been staggering!

Caught with his “pants down”!
Marcus Nunes
Sat, 02 Nov 2013 17:58:55 GMT

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