{"id":24918,"date":"2011-11-02T23:09:17","date_gmt":"2011-11-03T03:09:17","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/11\/02\/fed-up-with-inflation%e2%80%a6\/"},"modified":"2011-11-02T23:09:17","modified_gmt":"2011-11-03T03:09:17","slug":"fed-up-with-inflation","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/11\/02\/fed-up-with-inflation\/","title":{"rendered":"Fed Up With Inflation\u2026"},"content":{"rendered":"

By MoneyMorning.com.au<\/strong><\/p>\n

Are You Prepared to Make This Sure Bet? <\/p>\n

Making predictions is a tricky business.<\/p>\n

The probability of picking six correct numbers in a 49-ball lottery is one in 10 billion.<\/p>\n

In a two-horse race you’ve got a one-in-two chance. But there’s still no guarantee you’ll back the winning nag… even favourites get beaten sometimes.<\/p>\n

As a stock picker, we know that all too well.<\/p>\n

<\/span><\/p>\n

It’s no different to economic forecasters – or “economists” as they like to call themselves. (In our view most “economists” don’t deserve the title. They’re no more than guess-artists)<\/em>.<\/p>\n

<\/p>\n

The Fed Gets Four Out of Four… Wrong!<\/div>\n

<\/strong><\/p>\n

This morning we were amused by the latest “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents”.<\/p>\n

Put simply, every six months the U.S. Federal Reserve<\/strong> board members and presidents submit their forecasts for gross domestic product (GDP), the unemployment rate, Personal Consumption Expenditure (PCE) inflation<\/strong> and PCE core inflation (excludes food and energy).<\/p>\n

They make predictions for the current year and the next three years.<\/p>\n

It came as no surprise that in each case, the Fed board members and presidents underestimated<\/em> the unemployment rate and inflation rates for 2011… and overestimated<\/em> the GDP for 2011.<\/p>\n

In other words, on four occasions they backed the wrong horse in a two horse race.<\/p>\n

(By the way, the probability of picking four losers in four two-horse races is one in 16. So well done to the Fed!)<\/p>\n

Of course, any prediction will always be tainted by the personal views held by those making the prediction.<\/p>\n

Put another way, the U.S. Federal Reserve believes it’s doing the right thing by printing money and keeping interest rates artificially low. Therefore, when the Fed predicted in June that U.S. unemployment would be between 8.6% and 8.9% in 2011, it did so in the belief its policies would work.<\/p>\n

Six months later, when the policies clearly haven’t worked, the Fed has had to change its unemployment projection to between 9.0% and 9.1%.<\/p>\n

And it has had to revise upwards its inflation predictions… and revise down its GDP prediction.<\/p>\n

But that hasn’t stopped the Fed believing.<\/p>\n

<\/p>\n

Did Bernanke Tell a Porky About Price Inflation?<\/div>\n

<\/strong><\/p>\n

Because even though the forecast for PCE inflation<\/em> (including food and energy) has been revised up from a range of 2.3%-to-2.5% to 2.7%-to-2.9%, the Fed statement still reads:<\/p>\n

Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.<\/em><\/p>\n<\/blockquote>\n

So if we’ve got this right, even though the Fed got it wrong with its predictions for this year’s inflation rate, don’t worry. Because the Fed is sticking to its predictions for the next three years of lower inflation.<\/p>\n

So unconcerned is Dr. Bernanke about inflation, he told the press conference:<\/p>\n

The concerns that have been expressed relate to the possibility that the Fed’s highly expansionary policies might be contributing to inflation risk. I would simply point to the record. If you look back for the last five years, inflation – although it’s been volatile due to commodity price fluctuations – has averaged about two percent, which is close to a reasonable definition of price stability…<\/em><\/p>\n<\/blockquote>\n

As we say, the Fed still believes what it has done, and is doing is right.<\/p>\n

So we looked at the record… the Fed’s own<\/u> record…<\/p>\n

The Federal Reserve Bank of St. Louis provides a whole bunch of useful data. Including this chart on the Consumer Price Index for All Urban Consumers: All Items:<\/p>\n

\"consumer<\/a>
Click here<\/a> to enlarge<\/div>\n<\/p>\n

Over the past five years, the CPI for All Urban Consumers has risen from about 190 to about 225. By our calculations, that’s a consumer price inflation rate closer to 4.5% than 2%.<\/p>\n

But still, get used to the Fed talking down inflation.<\/p>\n

Because sometime in 2012 you can expect the Fed to push the money-printing button… again.<\/p>\n

So what you’ll see over the next three to four months is the Fed greasing the wheels… polishing the ball… and painting the shutters… getting the market ready for the inevitable money-printing 3 (MP3).<\/p>\n

On the one hand the Fed will continue to say inflation is low, while on the other hand it will keep revising upwards<\/em> its inflation forecasts.<\/p>\n

And we’re not the only ones to make a prediction on MP3…<\/p>\n

<\/p>\n

One Warning Sign Keeps Shining<\/div>\n

<\/strong><\/p>\n

According to Bloomberg News<\/em>:<\/p>\n

Sixty-nine percent of economists in a Bloomberg News survey expect the Fed to embark on a third round of bond buying, with a plurality of 36 percent of respondents seeing purchases beginning in the first quarter of 2012.<\/em><\/p>\n<\/blockquote>\n

Not only that. But as Fed chairman, Dr. Ben S. Bernanke hinted at a press conference this morning, the Fed’s next money-printing spree could involve buying mortgage-backed securities.<\/p>\n

Why not? They’ve tried everything else. None of it has worked – not that the Fed will admit it.<\/p>\n

Maybe they should start taking a long hard look at gold<\/a>\u2026<\/p>\n

Cheers.
\nKris.<\/strong><\/p>\n

PS.<\/strong> Don’t forget to register for the Sydney Gold Symposium<\/em>. It’s less than two weeks away. Your editor is due to chair day two of the event, including a panel discussion with Eric Sprott, Egon von Greyerz, Ben Davies and John Embry. Tickets are still available. Click here for more details…<\/a><\/p>\n

Related Articles<\/em><\/strong><\/p>\n

Why it’s Not Too Late to Avoid This Investing Mistake<\/a><\/p>\n

Three Steps to Wealth: Leverage, Volatility and Risk<\/a><\/p>\n

Two Decades of Boom and Bust<\/a><\/p>\n

Great News for Options Traders<\/a><\/p>\n

How to Turn Pennies into Pounds With Australia’s Most Exciting Companies<\/a><\/p>\n

From the Archives…<\/em><\/strong><\/p>\n

Gain Without Pain<\/a><\/strong>
\n2011-10-28 – Greg Canavan<\/p>\n

If a Butterfly Flaps its Wings in Frankston…<\/a><\/strong>
\n2011-10-27 – Kris Sayce<\/p>\n

Dr Doom’s Warning for Aussie Investors<\/a><\/strong>
\n2011-10-26 – Kris Sayce<\/p>\n

“Ctrl + Alt + Delete”<\/a><\/strong>
\n2011-10-25 – Dan Denning<\/p>\n

A Mistake That Could Cost Millions<\/a><\/strong>
\n2011-10-17 – Kris Sayce<\/p>\n

For editorial enquiries and feedback, email moneymorning@moneymorning.com.au<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nFed Up With Inflation\u2026 <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Are You Prepared to Make This Sure Bet? Making predictions is a tricky business. The probability of picking six correct numbers in a 49-ball lottery is one in 10 billion. In a two-horse race you’ve got a one-in-two chance. But there’s still no guarantee you’ll back the winning nag… even favourites get beaten … <\/p>\n

Continue reading “Fed Up With Inflation\u2026”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-24918","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24918","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=24918"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24918\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=24918"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=24918"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=24918"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}