Notes From Underground: Symmetric Inflation Targeting?

Yes, the leaves have shed, frost is certainly on the pumpkin and there’s even six inches of snow in Chicago. The news has been clogged with positive results from the recent phone calls between Lighthizer/Mnuchin and their Chinese negotiating partners. Even Commerce Secretary Wilbur Ross was aglow with positive news from his ASEAN meeting in Bangkok, Thailand. President Trump was tweeting about a possible signing ceremony in Iowa.

The S&Ps closed at all-time highs on Friday following the release of the employment data, which revealed a much more robust picture than economists and analysts had estimated. However, the ISM data was weak, which allowed the BONDS to pare some of the losses after the release of the unemployment report.

This is picture perfect for the equities: Low interest rates, solid jobs and better news on the TRADE AGENDA. The only question that bothers me: Why are the precious metals sustaining the recent recent rally as GOLD, SILVER, PALLADIUM and PLATINUM closed on the week’s highs.

Interestingly, the DOLLAR index closed out the week comfortably below the 200-day moving average. We need to watch this in light of the EQUITY MARKET strength. Some of the recent BIAS CORRELATION is breaking down as the flow into DOLLAR assets doesn’t provide the previous broad based outcomes.

In analyzing the recent moves it seems that Chairman Powell’s press conference caused some concern with the stress on the words “material reassessment” and “symmetric 2% inflation goal.” It seems that MATERIAL REASSESSMENT is directed at potential political headwinds — trade frictions, BREXIT, and election outcomes in many of the developed nations, particularly the December 12 election in the U.K. now that Prime Minister Johnson dissolved the Parliament and the recent rise of Elizabeth Warren in the polls in the U.S.

The issue of material reassessment does not pertain to economic data as Powell said the FED is attuned to a SYMMETRIC 2% INFLATION GOAL. The chairman didn’t define this GOAL so we are left to wonder what is the symmetric nature of inflation. Is it based on time or merely a desire to run hotter for longer? If the symmetry is time-based, then if PCE ran under 2% for 7 years shouldn’t inflation be able to run above 2% for a similar length of time? There is no clear definition but the markets have interpreted this GOAL as putting a dovish cap on interest rates for longer than the foreseeable future.

In a speech on Friday, Vice Chairman Richard Clarida also raised the issue of the SYMMETRIC 2% objective and invoked MATERIAL REASSESSMENT. The Clarida speech — delivered at the Japan Society in New York — was loaded with concerns about the slowdown in the global economy. He said, “Finally global disinflationary forces remain and present ongoing challenges to many central banks in their efforts to achieve and maintain price stability.”

Then in the conclusion of his speech Clarida reiterated the concerns that have been a focus of his work since the spring. We at NOTES FROM UNDERGROUND have maintained that Clarida has carved out a third mandate for the FED: The role of liquidity provider to the global financial system.

There is a fear of a FUNDING SQUEEZE that had helped push short-term rates higher and may have been responsible for the rise in U.S. bond and equity prices in the fourth-quarter of 2018. Clarida maintained: “In sum global conditions present headwinds for the U.S. outlook, and as my colleagues and I at the Federal reserve have emphasized, these headwinds have been a prominent consideration in our recent monetary policy assessments.”

If Clarida is correct then the dissenting votes of Presidents George and Rosengren are based solely on domestic concerns, while the remaining voters seem to be much more concerned about global influences. This remains until a material reassessment as rates will be LOWER FOR LONGER.

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2 Responses to “Notes From Underground: Symmetric Inflation Targeting?”

  1. ShockedToFindGambling Says:

    Yra….good article.

    You said……..The only question that bothers me: Why are the precious metals sustaining the recent recent rally as GOLD, SILVER, PALLADIUM and PLATINUM closed on the week’s highs.

    It seems to me that many believe that we are very late cycle…….so they are buying insurance.

    IMO, the Central Banks have created a world economy based on QE, NIRP, ZIRP…..and this model is not sustainable, long term.

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