Last night’s soft US inflation print dented taper prospects. From the BLS:
The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment. The energy index declined in November, offsetting increases in other indexes to result in the seasonally adjusted all items index being unchanged. The indexes for gasoline and for natural gas fell significantly, more than offsetting increases in the electricity and fuel oil indexes. The food index rose slightly in November, with the food at home index unchanged. The index for all items less food and energy rose 0.2 percent in November. Increases in the indexes for shelter and airline fares accounted for most of the increase, with the indexes for recreation and for used cars and trucks also rising. The indexes for apparel, for household furnishings and operations, and for new vehicles all declined in November. The all items index increased 1.2 percent over the last 12 months, a larger increase than the 1.0 percent rise for the 12 months ending October. The 12-month increase in the index for all items less food and energy remained at 1.7 percent for the third month in a row. The food index increased 1.2 percent over the last 12 months, while the energy index declined 2.4 percent.
The Fed’s core measures were very soft. From the Cleveland Fed (chart from Calculated Risk):
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.2% annualized rate) in November. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report. Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers was unchanged (with annualized rate of 0.4%) in November. The CPI less food and energy increased 0.2% (1.9% annualized rate) on a seasonally adjusted basis. Over the last 12 months, the median CPI rose 2.0%, the trimmed-mean CPI rose 1.6%, the CPI rose 1.2%, and the CPI less food and energy rose 1.7%
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Fed watcher, Tim Duy, has nice chart showing the firm downtrend in inflation and a dovish assessment:
I would say the Fed needs to abandon low-inflation concerns if they taper with these numbers, instead falling back on stable inflation expectations and a forecast of rising inflation. That forecast, however, really hasn’t worked out yet. Overall, “stronger and sustainable” and “progress toward goals” are in the eye’s of the beholder. Same too with “progress toward goals.” It depends on the goal. No wonder then that Fed officials appear so ridiculously noncommittal with regards to tapering. And no wonder then that market participants are also noncommittal over the outcome of this next meeting. Given that ambiguity, the Fed may have a difficult time communicating any policy changes. Does the tiny taper suggest a more hawkish Fed considering the path of inflation? Or a more dovish Fed considering the path of unemployment? With no strong market expectations, the Fed may worry that any action they take would be misinterpreted in the thin holiday trading. Perhaps they believe that Federal Reserve Chairman Ben Bernanke could smooth out any issues during the press conference, but there is no certainty in that prediction. It’s not like he cleared much up with the June press conference. The importance of communication is even more important given that the nature of tapering itself is on the table – no longer are we guaranteed a data-dependent policy as the calendar-dependent suggestion is on the table. Hence there is a good case to be made for leaving policy broadly unchanged with the exception of modification to the forward guidance while setting the stage for a policy shift next year. Finally, another reason to hold policy steady is the institutional changes raining down on the Federal Reserve. Next year we see a new chair, and new vice chair, a new governor, a new president, and a change in the FOMC that brings two hawkish voices into voting positions. Presumably, policymakers should be concerned that the policies they enact today will be consistent with the desires of the policymakers of two months from now. This is especially the case when policy is at an inflection point as it is now. In the absence of pressing need, it is thus easy to make the case that policy changes should be deferred to the next group of policymakers. Now, clearly the Fed would not let such an issue dissuade it from acting during a financial crisis, or in the face of incipient inflation risks. But neither of those are on the table right now, so there is no pressing need to act. Of course, some might argue that given the impending changes, this is this Fed’s last opportunity to leave its mark on policy – completely the opposite conclusion. More ambiguity.
Pro taper data last night included the rise to a new high in the NAHB builders confidence index. The sum total was stocks down a bit, bond yields down a bit and gold down quite a bit. I’ll stick with my call that they won’t go yet, but it is clearly tight.
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