Worried About Inflation, Fed to Consider Ending QE2 Early

Some members of the Fed are quite worried about inflation and speaking their mind:

Fed Should Consider Curtailing Stimulus Program, Bullard Says
March 28 (Bloomberg) -- St. Louis Federal Reserve Bank President James Bullard said policy makers should review whether to curtail a plan to buy $600 billion in Treasury securities, noting that the U.S. recovery may not need that much stimulus.

“The economy is looking pretty good,” Bullard said to reporters in Marseille, France, on March 26. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short,” he said, referring to the second round of so-called quantitative easing.
...
“If the economy is as strong as I think it is then I think it may be reasonable to send a signal to markets that we’re going to start withdrawing our stimulus, and I’d start by pulling up a little bit short on the QE2 program,” Bullard said. “We can’t be as accommodative as we are today for too long, we’ll create a lot of inflation if we do that.”

CPI is above its 2008 level so SS recipients should get a COLA this year, but like most of us who work and pay into SS, the gain will probably be eaten up completely by higher medical insurance costs.

• Table of COLAs: Social Security Cost of Living Adjustments by Year

At least most people on SS got a nice, big 5.8% raise in 2009 that they kept when CPI fell while most of the country took pay cuts or got no raises.

CPI Table by Year and Month

It ruins my day just to think how much my own medical insurance went up since that last SS COLA of 5.8%! 


Bob Brinker on Inflation


Bob Didn't have much to say about inflation this weekend other than his regular comparison of the Treasury Inflation Protected Securities yield versus regular Treasuries. He said the 10-year TIPS has a base rate of 1% and when you compare that to the 10-year Treasury yielding 3.43% you get a Treasury inflation expectation of almost 2.5% for that time frame. For the longest time frame, the 30-year TIPS is yielding 1.87% versus the 30-year Treasury Bond which is yielding 4.5% which prices in annual implied inflation rate of 2.625% over the next 30 years.  Bob believes these are the rates of inflation that the Treasury market expects on an annual basis over the next 10 and 30 years, respectively.

• See: More about TIPS - Treasury-Inflation Protected Securities

I don't completely agree because the federal reserve with QE2 is printing money to buy US Treasuries to keep rates low.  They currently buy about a third of treasury debt issued so there is significant demand holding rates lower than they would be in a "free market" environment.  Their buying could easily distort this calculation.

MONEYTALK GUEST March 27, 2011  

Bob Brinker had on John Mauldin to discuss his book, "Endgame: The End of the Debt SuperCycle and How it Changes Everything"

Fed Signals Rate Cuts Are Done, Lowers Growth Forecast for 2008

Today the Federal Reserve released the minutes from its last meeting. In these minutes they said cutting rates from 2.25% to 2.00% at the last meeting was a "close call" and they think future rate cuts are unlikely even if the economy contracts.

The FOMC also released their updates for GDP to rise between 0.3% to 1.2% this year. This is a reduction in their prior forecast of 1.3 to 2% GDP growth for 2008.

• The staff projection pointed to a contraction of real GDP in the first half of 2008 followed by a modest rise in the second half of this year, aided in part by the fiscal stimulus package. The forecast showed real GDP expanding at a rate somewhat above its potential in 2009, reflecting the impetus from cumulative monetary policy easing, continued strength in net exports, a gradual lessening in financial market strains, and the waning drag from past increases in energy prices.

They also raised their forecasts for the unemployment rate, CPI or "headline inflation" and core inflation as measured the price index for personal consumption expenditures, or PCE, that Bob Brinker has discussed on his show.

For the short term, they expect inflation pressure from higher energy prices to continue:

• The forecast of headline PCE inflation in 2008 was revised up in light of the further run-up in energy prices and somewhat higher food price inflation;
• headline PCE inflation was expected to exceed core PCE price inflation by a considerable margin this year.
• In view of the projected slack in resource utilization in 2009 and flattening out of oil and other commodity prices, both core and headline PCE price inflation were projected to drop back from their 2008 levels, in line with the staff's previous forecasts.

For 2010 they expect inflation as measured by the overall PCE to moderate.

• On balance, participants expected the recent increases in oil and food prices to continue to boost overall consumer price inflation in the near term; thereafter, total inflation was projected to moderate, with all participants expecting total PCE inflation of between 1-1/2 percent and 2 percent by 2010.

From An Alternative To Bob Brinker's Inflation Outlook:

• Bob Brinker: "We have always maintained that rising oil prices act as a tax on consumers, and are therefore counter-inflationary as they have a negative impact on consumer discretionary spending power." (No mention of core inflation)

Jim Cramer says "Financials Can Be Bought Now"

Where is Bob Brinker? Jim Cramer just came on TV (Noon PST, January 30, 2008) and said with today's 0.50% rate cut by the Fed after cutting 0.75% last week, Financials (Citigroup, XLF, etc.) can be bought here as the fed "gets it" and "all is forgiven." Bond Guru Bill Gross of Pimco followed and took a bow for predicting on National TV and on his web site that the Fed would cut rates to 3.0% in 2008. I can vouch for that as I saw and read Bill Gross predict the Federal Reserve Open Market Committee would need to cut rates to 3.0%. Bill gets high kudos from me as he did this without ranting and raving about Ben Bernanke like the other two did.



Has Bob Brinker said anything about the markets or sent any special buy bulletins of late? If I missed any announcements by Brinker about finding that bottom he was looking when the S&P500 was at 1325, please send me an email or post about it on our "Bob Brinker Discussion Forum" at Facebook's "Investing for the Long Term."

For Brinker's sake, I hope he didn't switch from "Lump Sum in Mid 1400's" to "Dollar Cost Average until I identify a bottom" nearly to the day the market bottomed!

Only question is why wait for Jim Cramer or Bob Brinker? I already bought financials for my newsletter and personal account. Citigroup currently at $29 yields 4.60%, more than you will get at Vanguard's money fund after they cut rates and more than many CDs will pay once banks start to lower rates. XLF at $28.64 yields 3.66%. Why wait for Brinker or Cramer to tell you how to invest?

==> High Yield CDs

See:

• Jim Cramer's Rant with Erin Burnett: "Cramer Meltdown Video"
  
• Monthly Chart & Fed Fund Rate Cut Suggests The Bottom Is In

==> High Yield CDs <==

Kirk's Investment Newsletter: Testimonials - Subscribe Now

FOMC Chairman Ben Bernanke says 'Substantive' Rate Cuts May Come Soon

Bob Brinker has said the Federal Reserve Chairman Ben Bernanke has been making rookie mistakes to worry too much about inflation. In a speech yesterday FOMC Chairman Ben Bernanke strongly hinted the Fed would reduce its short-term interest-rate target, probably by half a percentage point from its current 4.25%, at the central bank's next meeting, Jan. 29-30. He said the Fed could act before then if needed but it would take a dramatic deterioration in the markets or exceptionally bad economic data.

From Bob Brinker Moneytalk Summary, January 5-6, 2008, Honeybee wrote:

Excerpts of Brinker's reply (to a caller): “I think we can identify what we certainly know would cause a recession. One thing would be if the Fed gets it wrong. If the Fed interprets, for example, high oil prices as a priority – now so, far they have not done this…………then they would make the mistake, which would be very disappointing, that they would think that they can actually control oil prices – which they cannot. They have no power whatsoever. Oil is a global commodity, and they have no power whatsoever at the Fed, or to even have a significant impact. If they make the mistake of thinking that they have to fight oil prices by raising rates, then that will cause a recession. All they have to do is go back into a pattern of raising interest rates –tightening monetary policy--that will definitely cause a recession. There is no question in my mind.
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So far they have gone the other way……..I expect them to cut rates again by the end of this month – at the January 30th meeting, at the latest……And I wouldn’t be surprised to see them cut rates again after that, because they are behind the curve. We have a ROOKIE at the controls at the Fed. I’ve talked about it for months, and you have ROOKIE risk. And ROOKIE risk tells you that the ROOKIE in control may not do everything the perfect way…….They were locked in their IVORY TOWER going into August. We were badgering them to death – I don’t think they care."

Bernanke said the Fed must "remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."

The Wall Street Journal reported today:

• The speech comes at a crucial time for the Fed. Mr. Bernanke noted that until last spring the central bank thought it was facing "the classic problem of managing the midcycle slowdown" -- guiding the economy from rapid to slower growth in order to keep inflation in check. But the dramatic deterioration in housing and credit markets since then has significantly raised the risk of recession -- an outright contraction of economic activity and employment lasting at least six months.
  
• Inflation concerns figured in yesterday's decisions by the ECB and the Bank of England to leave their interest-rate targets at 4% and 5.5%, respectively.ECB President Jean-Claude Trichet suggested at a news conference following the ECB's meeting that the threat of higher inflation remains the central bank's top concern. Euro-zone consumer-price inflation in November and December was at a 6½-year high of 3.1%, well above the ECB's goal of just under 2%, and policy makers expect high food and energy prices to keep the rate elevated in coming months. Mr. Trichet warned the ECB "is monitoring wage negotiations...with particular attention."
  
• The Bank of England will release minutes of yesterday's meeting on Jan. 23. They are expected to show the bank kept rates steady because of inflation concerns -- including fresh utility-price increases and the pound's 7% fall against the dollar since November.

Asked about a possible recession, Mr. Bernanke said, "The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth. But...it's very important for us to stand ready...to address those risks and provide some insurance against those negative outcomes."

What changed for Mr Bernanke?

The U.S. employment report for December showed a decline in private-sector jobs. Mr Bernanke said this was "disappointing," and added "[Previously,] relatively steady gains in wage and salary income [were] providing households the wherewithal to support moderate growth" in spending. "Should the labor market deteriorate, the risks to consumer spending would rise," he said.

The higher unemployment rate, 5% in December up from 4.7% in November, shows that one inflationary pressure, higher wages from tight labor markets, is declining.

To make the Fed's job harder, the labor department yesterday reported initial claims for unemployment benefits fell 15,000 to 322,000 last week, the second straight decline, suggesting the labor market isn't deteriorating dramatically.

When former FOMC Chairman Allan Greenspan kept increasing interest rates above 4% to reign in the housing bubble, Bob Brinker complained on his Moneytalk radio show by saying:

"What does Allan Greenspan have against people's home prices going up?"

Clearly the FOMC was right to be concerned and they probably should not have kept rates so low for so long and better monitored the loans member banks were making so they would not have a mess to clean up today.

Options Predict The Fed Will Cut Rates

Last weekend Bob Brinker said that a 25 basis interest rate point cut is "baked in the cake." Beyond that amount, he doesn't know. How does he predict this?

The Cleveland Fed has a nice page that shows what the futures predict for rates over time: "Monetary Policy :: Fed Funds Rate Predictions." On that page they currently show this graph:

Click to view larger graph
The odds can be read off the side of the graph. The odds are now:

• 70% for a 0.25% cut to 4.50%
• 15% for a 0.50% cut to 4.25%
• 15% they leave rates unchanged at 4.75%

So... there is an 85% chance we get a rate cut of 0.25 to 0.50% and 15% chance they keep rates at 4.75%. So, Bob's rate cut cake is "85% baked" as of yesterday's data.

Bob Brinker on Price of Oil vs Inflation

Inflation is the loss of purchasing power. Most people understand that higher prices mean you can buy less with a given amount of money but Bob Brinker says otherwise.

5/12/06: Price of Oil and Inflation

Bob Brinker says Ben Bernanke, the chairman of the Federal Reserve, has it wrong. Bob Brinker says higher priced oil is not inflationary.

In his April 30th, 2006 monologue, Bob Brinker said:

"We have kept you informed what is really going on in the world of inflation, which is virtually nothing. As you know, oil prices have skyrocketed and are now setting up near all time highs in the low $70s. Oil prices literally going through the roof, and yet to the consternation of many, not listeners to Moneytalk, but to many, including, apparently, the Fed Chairman, they think oil prices are inflationary. That's because they don't understand, they don't understand the taxing effect that these higher gasoline prices have on your pocketbook.

As we've discussed on the program, the vast majority of people in America today cannot even afford to fill up their gas tank. They can't put the $40, $50, $60, $70 worth into their gas tank because they don't operate on a budget like that. Sure, there are some well-heeled that can do it and not care very much about it, but the vast majority of Americans cannot even afford a $40, $50, $60, $70 fill-up on a regular basis-they just can't afford it.

Perhaps Bob Brinker's listeners really cannot afford to fill their gas tanks but I see little difference between Brinker's low-income listeners paying more for gasoline or for rent. An increase in either gasoline or rent is inflationary because it is the total spending and how much you get for it, purchasing power, that matters. If the poor can't afford increases from inflation then they usually downsize their standard of living such as moving to a cheaper apartment, taking the bus rather than driving or eating cheaper food. Some will even get a second job to "make ends meet." The middle class usually saves less and those of us who can afford it, we might give less to charity or spend less on our luxuries. One thing remains constant, higher priced gasoline means we all can't afford what we could before unless we get a raise to compensate for higher prices.

Inflation is near 15-year highs. I have charted the price of Oil and Inflation between 1994.

From the charts, you can see that the ups and downs for inflation seem well correlated with the price of oil. To argue otherwise seems rather foolish to me.

Bob, a "taxing effect" means you get less of something, not a sign change.