Looks like the Fed was right in focusing in Core CPI afterall

[Cutten]

Quote from Daal:

they took the blame for the big spike in overall cpi but now where are the ETrs who will give them credit for the plunge in food and energy prices?

Since the plunge in commodities is due to the worst global recession for decades, why on earth would it be something to award "credit" for? It's not like they somehow got input prices down whilst the economy rolled along happily.

Last year Bernanke and Paulson said there would be no recession. Then they said subprime was contained and would be over later this year. They have been wrong, wrong, wrong. The reason prices are falling is because the economy is a total disaster, not because of sound central bank policy.

 

[dhpar]

Quote from Daal:

CPI yoy is tanking. now just where are the props for bernanke for guessing correctly what would happen to food and energy prices?He predicted better than 90% of the people who went on bloomberg and cnbc

well he must be a genius then. i guess he also predicted that we will get there through completely screwing up everything, credit crunch, no IBs, crude at 50 etc.

 

[Daal]

Quote from Cutten:

Since the plunge in commodities is due to the worst global recession for decades, why on earth would it be something to award "credit" for? It's not like they somehow got input prices down whilst the economy rolled along happily.

Last year Bernanke and Paulson said there would be no recession. Then they said subprime was contained and would be over later this year. They have been wrong, wrong, wrong. The reason prices are falling is because the economy is a total disaster, not because of sound central bank policy.

I agree with all of this. of course my point if they should not have gotten the blame for food energy surge in the first place since m1 growth was pretty modest

 

[Cutten]

Quote from Daal:

I agree with all of this. of course my point if they should not have gotten the blame for food energy surge in the first place since m1 growth was pretty modest

The surge in commodities, where it went from bull market to blowoff, correlated pretty well with their easing cycle. I would say they exacerbated it to some extent.

They would get 'credit' for the current commodity collapse if it was something they contributed to. But it's hard to see how they did - unless of course you mean their complacent approach from 2003-2007, totally ignoring a once in a lifetime housing and credit bubble which was inflating before their very eyes. In that case, I guess you could give them "credit" for contributing to a recession severe enough to take down half of Wall Street and plunge the world into crisis. Good job Fed

 

[Cutten]

Quote from makloda:

Excellent post. I wonder what happened to the ET resident inflation bulls. Looks like they went into hibernation.

They will be back.

The stopped clocks got wiped out. The traders got stopped out, recognised the trend was over, and moved on to other money-making opportunities, like going short.

 

[Daal]

Quote from Cutten:

The surge in commodities, where it went from bull market to blowoff, correlated pretty well with their easing cycle. I would say they exacerbated it to some extent.

Yet the fed was right all along that the move was unsustainable, had they hiked like rogers told them too, it would have squeezed bank margins and interest spreads would been absurdly higher

regarding complacency during the credit/housing bubble, they were riding an unstoppable bubble that happened worldwide in dozens of countries due historic low real long-term interest rates
which they dont control(the 'conundrum')

Plus if greenspan went to congress and said 'I think we ought end homeonwership to low income americans through draconic regulation', he gets lynched and congress shuts the fed down the next week

 

[Daal]

Quote from Cutten:

The surge in commodities, where it went from bull market to blowoff, correlated pretty well with their easing cycle. I would say they exacerbated it to some extent.

the market was wrong in the inflationary consequences of the easing so its hard to blame the fed for temporary price hike given that it was a mistake by the market which was then corrected

 

[Cutten]

Don't forget, the housing boom was stimulated by 1% interest rates in 03 and onward. I agree the Fed was not the only or even sole contributor, however they had a significant impact IMO. They did the same policy as in the late 90s with stocks - ignoring the asset bubble and dealing with the aftermath. Well, after 2 destructive bubbles and busts in 9 years, I think it's time to revisit that policy.

Also, if the Fed can't affect the economy, or go counter-cyclical, then what are they for? Their whole reason for existing is based on the premise that i) they can affect the economy, and ii) they can do so counter-cyclically. If those premises are both false, as you seem to imply - whether it is for economic reasons, or political reasons - then what is the purpose of having a central bank?

 

[Cutten]

Quote from Daal:

the market was wrong in the inflationary consequences of the easing so its hard to blame the fed for temporary price hike given that it was a mistake by the market which was then corrected

Was it a mistake though? Prices in commodities are not speculations on far future value in the same way that as stocks are. Commodity prices are set by immediate supply & demand needs mostly, albeit speculation can swing things up and down for a while. Industry needed oil in late 2007 and H2 2008, and was prepared to pay $100-147 a barrel for it. And don't forget that part of the reason prices are lower now is because they went so high. The cause of low prices is prior high prices, and vice versa.

Also, part of the reason the market was wrong was because of the distorting effect on credit of a Fed easing cycle. The Fed cutting made rates go lower than normal, encouraging more lending. Their reaction to a weakening financial system ironically exaggerated investment in the one remaining healthy part of the economy, causing excessive prices, and now a subsequent bigger than necessary bust the other direction.

This is part of the argument against central banks - they cause overinvestment. Each time they respond to one sector getting into trouble, they cause overinvestment and speculative excess in other sectors, thus setting up the next bust. An infinite bubble-blowing machine.

 

[rodmike9]

Quote from Cutten:

Was it a mistake though? Prices in commodities are not speculations on far future value in the same way that as stocks are. Commodity prices are set by immediate supply & demand needs mostly, albeit speculation can swing things up and down for a while. Industry needed oil in late 2007 and H2 2008, and was prepared to pay $100-147 a barrel for it. And don't forget that part of the reason prices are lower now is because they went so high. The cause of low prices is prior high prices, and vice versa.

Also, part of the reason the market was wrong was because of the distorting effect on credit of a Fed easing cycle. The Fed cutting made rates go lower than normal, encouraging more lending. Their reaction to a weakening financial system ironically exaggerated investment in the one remaining healthy part of the economy, causing excessive prices, and now a subsequent bigger than necessary bust the other direction.

This is part of the argument against central banks - they cause overinvestment. Each time they respond to one sector getting into trouble, they cause overinvestment and speculative excess in other sectors, thus setting up the next bust. An infinite bubble-blowing machine.

well said