Federal Reserve | timiacono.com - Part 4

Maybe 2% Inflation Isn’t Ideal

Among the many rate-hike-related themes appearing in the financial media this week is what some are calling the Federal Reserve’s “Inflation Conundrum”, an homage to a similar stumping of the central bank more than a decade ago when short-term rates were raised but long-term rates didn’t budge, that is, until the yield curve inverted and, voila!, financial crisis and recession ensued when another asset bubble burst.

The WSJ weighs in with The Mystery of Missing Inflation Weighs on Fed Rate Move ($) today.

Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, close to estimates of full employment, but inflation is stuck at less than 1%, well below the Fed’s 2% target.

Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Fed officials also don’t know why they target a 2 percent inflation rate rather than say, 1 percent or 3 percent or some other number, a question that is perhaps worth answering first, before they attempt any further investigation into why they’re not meeting this target.

Echoes of the 2008 Financial Crisis

Michael Lewis talks to Stephen Colbert about the new movie based on his book The Big Short and details the big problem with having bailed out the big banks.

Also see Third Avenue Fund’s Eerie Financial-Crisis Echo for an explanation of why the word echoes is plural in the title above.

American Middle Class R.I.P.?

Now that Pew Research has come out with some definitive (and quite compelling) data about the decline of the American middle class over the last few decades, it’s worth recalling how the one-percenters of the world think about this problem…

Lots of good related stories such as Most Americans Aren’t Middle Class Anymore and Middle-class families, pillar of the American dream, are no longer in the majority as another piece of the explanation for Donald Trump’s success unfolds, namely, from the latter:

Median-income voters, particularly non-college-educated men, are also at the core of billionaire Donald Trump’s surprising surge in the Republican presidential campaign. His supporters’ sense that their once-secure middle-class standing is in danger of slipping appears to be fueling much of the anger against the government and immigrant groups.

Global QE on a Grand Scale

Among the many other interesting (and, to varying degrees, alarming) graphics in Jeff Gundlach’s monthly commentary at Doubleline Capital is the chart below depicting the global, multi-year money printing extravaganza offered up by the world’s central banks.

Of course, the headlines this report is generating involve the predicted “real carnage” in junk bonds per Reuters and a holiday metaphor for the Fed getting cold feet next week, “It’s possible the Fed pulls another Lucy and the football,” Gundlach said, referring to Peanuts character Lucy yanking a football away from Charlie Brown (as shown below).

(more…)

Oil Prices and Junk Bonds

Amid the “uneasy calm” in financial markets, as detailed by the Bank for International Settlements the other day in their quarterly report, comes news of an even deeper plunge in oil prices (with calls for $20 a barrel or below) and more distress in high yield bonds (an outsize portion of which is energy related). One of the driving forces behind these developments is the graphic below via this item at the WSJ.

I’d never seen these two curves side-by-side, but it tells a pretty compelling story about the global game of chicken now being played by the Saudis and shale oil producers in the U.S., importantly, along with their Wall Street financiers. Of course, it doesn’t help that the China slowdown appears to be for real and that central banks continued to be viewed as “the only game in town” when it comes to restoring the global economy to its former glory…

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