Good article on how the Fed is using doctored inflation figures to ram through their agenda. I especially like the passage on "degradation of services", which is always overlooked and under-measured:
quote.bloomberg.com
04/19 14:37
Price Stability, a Mandate Missing in Action: Caroline Baum
By Caroline Baum
New York, April 19 (Bloomberg) -- If you were to corner a central banker, be he American, German, Brazilian or Lithuanian, and ask him what the bank's role is, without a moment's hesitation he would say to foster price stability.
For that is the role of the central bank, even if, as in the case of the Federal Reserve, the monetary authority has an official dual mandate of price stability and full employment.
Section 2A of the 1913 Federal Reserve Act states the following:
``The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy's long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.''
The belief that there can be a permanent trade-off between employment (growth) and inflation had a rude comeuppance in the 1970s. Today central bankers understand that the only way to achieve maximum employment is through stable prices, or low inflation.
Parsing the statement accompanying the Fed's announcement of a 50 basis-point cut in both the federal funds and discount rates yesterday, as well as other recent statements, one is struck by how far the Fed has strayed from its unstated yet universally accepted mandate.
Function Dysfunction
The raison d'etre for yesterday's fourth cut in as many months was weak capital spending and corporate profits. On March 20, the Fed cited the risk that demand and production could remain soft due to excess capacity. On Jan. 31, it was the erosion in business and consumer confidence, exacerbated by rising energy costs. (Note: It was these same high energy costs that presented inflation risks as recently as Nov. 15.) And on Jan. 3, the first rate cut of this series, which came between meetings as well, it was a grab-bag of weakening sales and production, waning consumer confidence, tight conditions in financial markets and high energy prices, which had morphed into a drain on purchasing power.
Almost everyone applauded the Fed's move yesterday. Almost no one took issue with the reason. If capital investment is weak, wouldn't a cut in the capital gains tax be the appropriate antidote?
Twisted Logic
Trolling the Bloomberg wires for a quote from a conservative group to illustrate my point, I came across an interview with Martin Regalia, chief economist at the U.S. Chamber of Commerce, that threw me for a loop.
Regalia told Bloomberg TV yesterday that the recent data on prices, at least the headline numbers, were good, giving the Fed the opportunity to move.
``On the other hand, the core indices were a little bit high and I don't think they wanted to wait and have the market start to second-guess their May 15 move, to have people saying, hey production has picked up, inflation is up a little bit, maybe the Fed won't move,'' he said. ``They wanted to get it in ahead of time, get it in before the market had time to over-think this'' and keep the economy moving forward.
Huh? Unfortunately, this isn't the first time I've heard that tortured logic. The thinking goes something like this: The Fed gets a small window in which to administer its interest-rate medicine, after which the market will react adversely because the economic data call into question the necessity or advisability of such a move.
A call to Regalia was in order.
Ding-a-Ling
CB: ``Marty, it sounds to me as if you're saying that the Fed can fool most of the people most of the time.''
MR: ``In so many words, yes. The Fed has two targets and one instrument. Sometimes it gets them into a political bind, as it may be doing now. They don't want worries about inflation to get in the way of a weak economy.''
Now that makes a lot of sense! Let's sneak this one in quickly, boys, because next month the headline inflation numbers will be lousy, the core keeps inching up, the first-quarter productivity numbers will be a wash-out, and we won't be able to ease.
There's always a chance some official will suggest the CPI overstates inflation.
Bingo! Alan Greenspan already has. At a speech to the National Association for Business Economics in March, Greenspan broached the challenges of measuring and modeling our dynamic economy. He noted that medical procedures, which used to require a hospital stay, are now are performed on an outpatient basis.
``This has raised significant questions as to whether our current measures of overall medical service price inflation are capturing the appropriate degree of productivity advance evident in medicine,'' the Fed chairman said.
Greenspan on Hold?
Clearly someone of Greenspan's stature doesn't have much first-hand experience with HMOs, with eternal phone menus, with tech support. The degradation of services is the true cost of inflation in our dynamic economy, and it's not captured in the statistics either.
The last CPI fix in 1999 changed the sampling method by which residential rents and owners' equivalent rent, two components of housing, are measured. (OER imputes a rental value to a home.) The change did wonders for the core CPI, of which OER makes up 26 percent. It decelerated through 1999, bottoming in December at a 1.9 percent annual increase.
OER hit a trough in December 1999 as well, with a year-over year increase of 2.4 percent. That was the smallest increase in the 18-year history of the series and bore no relationship to what was going on in either the rental or the purchase market for homes.
It's payback time. In the first quarter of 2001, OER rose an annualized 4 percent while the core CPI was up 3.2 percent, the biggest increase for both series since the mid 1990s.
The economy is sputtering right now, but the Fed has stepped on the gas pedal, lowering rates by 200 basis points in less than four months, and cranked up the monetary printing presses. What better time to tweak the CPI methodology to make inflation look better?
If you can't wring it out, you can always define it away. |
