February 22, 2019

IT'S A DEFLATIONARY EPOCH:

A Fed pivot, born of volatility, missteps, and new economic reality (Howard Schneider, Jonathan Spicer, 2/22/19, Reuters)

Interviews with officials as well as analysis of Fed minutes and policymakers' public statements suggest the emergence of a long-elusive consensus that interest rates would likely never return to pre-crisis levels, and that once established relationships, such as inflation rising when unemployment fell, no longer worked.

Concern that years of solid economic growth and falling unemployment would inevitably rekindle inflation or threaten financial stability have been a staple of Fed debates, but had largely disappeared by the Fed's Dec. 18-19 meeting, according to a review of Fed meeting minutes and officials' public statements.

It was a conclusion hiding in plain sight. After a year when the Trump administration pumped around $1.5 trillion of tax cuts and public spending into a full employment economy, the Fed in 2018 would miss its 2 percent inflation target yet again.

"I hate to say we were right," Dallas Federal Reserve president Robert Kaplan told reporters on Jan. 15 in Dallas. "But we have been warning for quite some time that...the structure of the economy has changed dramatically."

Technological innovation, globalization, and the Fed's commitment to its inflation target all held down prices, and "those forces are powerful and they are accelerating," he said.

His arguments echoed those made by St. Louis Fed president James Bullard and Minneapolis Fed president Neel Kashkari. New Fed vice chairman Richard Clarida and Governor Lael Brainard have flagged similar issues.

Later in January, the Fed's policy meeting jettisoned mention of any further rate increases and cited "muted inflation" among the reasons, largely aligning the Fed with the prevailing sentiment among investors who saw conditions weakening.

This even with the inflationary impact of Trumponomics.

Posted by at February 22, 2019 5:10 PM

  

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