Fed holds fire on disinflation threat


by Chris Becker

The US Federal Reserve released its minutes from the December FOMC meeting just a few hours ago AEDST time (available here). The reaction on the markets has been mixed, whereas the pundits are chewing at the bit for signs of where the Fed shall strike next, with any rate rises put off until at least April.

Adam Button at ForexLive has the sceptical take on inflation:

The FOMC minutes show a total disregard for the signals markets are sending about disinflation. Five year breakeven rates are plunging, implying that 1.09% average inflation over that period.
The Fed discussed this problem of signaling rate hikes while the market signals disinflation in the Dec 16-17 FOMC minutes and had this to say.

Instead of listening to the market. The Fed decided to listen to its models — the same kinds of models that assumed house price declines wouldn’t happen or be limited. On top of that, Yellen specifically mentioned the University of Michigan survey on inflation expectations, which has overestimated inflation by 200 basis points for the past three years.


This hearing disorder probably has grown out of an optimism condition, with most members dismissing any external risks, e.g deflation in Europe or fallout from the oil price collapse, with most betting on the ECB and others “doing something”, although some saw downside risks if “foreign policy responses were insufficient”.

The question of rate rises by the Fed is being pushed out further and further, with the key point raised but not yet widely analysed is the lack of any acceleration in wages, although the huge relief from oil halving is sure to have an impact on disposable income. Wages have finally recovered from the GFC low:


Whether this filters through to inflation is hard to gauge, which is stubbornly staying at or below 2% with core inflation slipping.

I would suggest unless this changes – and forward looking breakevens and the yield curve indicate no such change for a long time – rate rises will be off the table for a long, long time.


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  1. The other issue,of course, is that if the Fed were to tighten and the ECB finally prints, the Fed may end up with a Euro carry to contend with. Lower yields and a stronger USD than they’d want.

    • 71.2% of the US$ index is made up of the Euro and the Yen…so the US$ looks strong in comparison.
      The US$ has been falling for many years, and more recently since the Plaza Accord in 1985.

      Against XAU, the US$ has fallen an average of 12.2% per year for the last 14 years.

      There will be no printing in Euroland without Germany’s permission.
      On 30th November 1923 one ounce of gold was worth
      87Trillion German marks.

  2. US interest rates have been for so low for so long that most people seem to just think they are normal and not the sign of fundamental problems that remain unresolved.

    Its like John Travolta feeling relieved after jabbing 20 doses of adrenalin in Urma Thurman and the response produced is a flickering eye-lash.

    Interest rates this low should have set off a boom of such size that rising interest rates would be unavoidable not a topic of speculation.

    Too much interest bearing debt public and private.

    Until we start discussing the fastest and most effective and equitable methods of eradicating those debilitating accounting entries the BEST we can hope for is something like Japan 1990-2015.

    And by best I mean pretty good. With the buffoons we have setting policy we may realise pretty soon that the Japanese were not great but at least half decent at handling an asset price bust.

    • Finally some MACRO vision.

      Pfh007 is entirely correct, we have had a paradigm shift rather than any empirical shift.

  3. And yet no effect on the AUD?

    Does anyone have any ideas why not? Since it was mainly USD strengthening (and threat of increased US rates) that triggered the recent falls.