CPI, Empire, and Bernanke’s managing of expectations

Right, core is giving Bernanke ‘cover’ to not do any more QE.

I think he now realizes QE doesn’t actually do anything positive for the economy, as all his staff studies show. Yes, it can lower term rates a tad, but it also removes interest income as he himself seemed to have recognized in his own 2004 research paper.

But he also recognizes that it does scare the living daylight out of the likes of China and other portfolio managers who don’t understand monetary operations.

So he’s in a bit of a bind, as his tone of voice showed while responding to live questions.

If he says QE doesn’t do anything, he destroys what he now considers the useful fiction that the Fed has more tools in its toolbox, as markets would realize they are now flying without a net vs the belief in a ‘Bernanke put.’

And so he assures China there will be no more QE, while explaining to Congress that higher core inflation makes QE inappropriate at this time. And while this could be called intellectually dishonest, it’s also required under ‘expectations theory’ that says managing expectations is critical to price stability and optimal output.

As previously discussed, they all believe in the Confidence Fairy, and that economic performance is in no small way a function of expectations.

Also, while outlooks were positive, below, they were less positive than before.

And Michigan just came in lower than expected as well. The jury is still out on when the economic soft spot might end.

And Aug 3 looks to remove US and therefore world aggregate demand, one way or another.

Karim writes:

  • Headline declines as expected on energy (-0.2%); core much stronger than expected (0.3%)
  • Supports key message BB has been delivering that bar is high for QE3 due to core inflation high and rising now, vs low and falling a year ago
  • A year ago, Core CPI was 0.9%, with the 3mth and 6mth rate annualized rates of change near Zero
  • Now, Core CPI is 1.6% (highest since late 2009) and the 3mth and 6mth annualized rates of change are 2.9% and 2.5%.
  • What is interesting in looking at the attached chart is that the change from the lows is the highest in about 5yrs, and much higher than when oil went to $150 back in the summer of 2008
  • The key is OER (1/3 of core) is now trending at 0.1-0.2% m/m; combined with the other ‘sticky’ components of core (i.e., medical, education), its hard to see core falling back below 1.5%

Empire Survey: Modest gains in current conditions and strong gains in 6mth Outlook

Current July June
Business Conditions -3.76 -7.79
Prices Paid 43.33 56.12
New Orders -5.45 -3.61
Shipments 2.22 -8.02
Delivery Times 1.11 -3.06
Inventories -5.56 1.02
Employees 1.11 10.20
Workweek -15.56 -2.04

6MTH Outlook July June
Business Conditions 32.22 22.45
Prices Paid 51.11 55.10
Prices Received 30.00 19.39
New Orders 25.56 15.31
Shipments 30.00 17.35
Delivery Times 6.67 2.04
Inventories 1.11 -9.18
Unfilled Orders 5.56 -9.18
Employees 17.78 6.12
Workweek 2.22 -2.04
Capital Expenditures 22.22 26.53
Technology Spending 12.22 14.29

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