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June 18, 2014

The Fed Just Lost Any Shred of Credibility on Inflation

By EconMatters

Those High Chicken Prices are just Noise – Tell that to the Cashier

The Fed today in their press conference lost any credibility on a number of issues, and it really goes to show that they have no clue what they are doing at this point. First they called the overheating inflation in the economy Noise, yes you heard right NOISE which is now showing up even in the watered down indexes used to track it by the Fed, and already above their target of 2% on a year over year basis and rising, (wait until you see the next two month`s CPI reports on a spike in gasoline prices as we enter the summer driving season).

 


45% Appreciation is Normal Price Discovery & In-Line with Historical Norms

Then Janet Yellen says she sees no signs of a bubble in equity prices after a 35% appreciation followed by what looks like another 10% plus year of appreciation in the cards for 2014. It is one thing to be dovish, but when one goes out of their way to mischaracterize the data to such an extreme that it makes one lose any credibility just to justify a given monetary policy, that is when the proverbial shit hits the fan.


No Clue at this Point!

We would expect some major market vigilantism and volatility once the next hot Employment report comes in two weeks, and a scorching CPI Report hits the tape in four weeks that only reinforces the fact that the Federal Reserve has no clue what they are doing at this point, and Janet Yellen is basically my Grandmother in charge of the Federal Reserve. 

Frankly, that is doing a major disservice to my grandmother who could spot inflation when she sees it, there is no hope right now after hearing Janet Yellen speak in the press conference, she is completely incompetent and the exact worse person for what we are now entering in the inflation era!


Managing Market Expectations

I tried to give her the benefit of the doubt, that she is just trying to talk down the market to keep rates low for as long as possible, and maybe even the hot inflation data recedes a slight bit; but even with the strategy of dropping the tightening monetary bomb all at once versus slowly raising market expectations in an incremental fashion, she still will be setting markets up for a huge disastrous exit event the longer she prolongs the inevitable. 

But after listening to her talk in the press conference I am not even sure she is a qualified economist, moreover it is apparent she has no formal timeline for unwinding, and she cannot even properly understand basic economic relationships that any first year econ major has down after mid-terms!


Go back and look at the inflation data and explain to me why this is not an upward trend for 2014, and an unsettling trend given GDP was actually negative for the first quarter, what happens to inflation when GDP prints a 4 handle later this year? What happens to inflation when the strongest part of the year from a consumption and GDP standpoint comes gushing into the CPI Reports? Janet Yellen didn`t think that UPS and Fed-Ex recently raising their pricing policy to now cover size of packages from a volume standpoint versus strictly weight had anything to do with inflation? Guess when these price increases are going to push through into the economic data sets - a clue - future PPI & CPI Inflation reports! 

If you have analysts who track these types of pricing pressures, and you can run forward models, why set yourself up to fail miserably in the future – it’s called managing expectations! She really has set herself up to fail by stubbornly refusing to acknowledge even near-term inflation levels, let alone future inflation pressures that will be much higher than her targeted forecast! These are basic corporate level CEO skills that any competent person in a management role understands, and it is unsettling that she doesn`t get this basic concept, and is managing the most powerful corporate board in the world!


Yellen`s Shelf-Life 2 Years

She has got to be the most dovish Fed chairperson in the history of the institution going into the most important policy initiative withdrawal phase ever to be recorded since the inception of the Federal Reserve! 

She will probably step down in a year at this rate, as she obviously was the wrong person for the job! President Obama should have chosen Larry Summers for the position, and now this is really going to cause the entire monetary experiment to blow up, it is looking more and more like a foregone conclusion. 

We are now going to have to resurrect Paul Volcker`s spirit to the Federal Reserve to dig us out this hyperinflation mess, once inflation I mean Noise gets so unbearable that Janet Yellen is forced to embarrassingly resign by the president as the bond market takes matters into its own hands!


35% Probability of Hyperinflation Cycle

With her increasingly dovish incompetence being on full display for market participants instead of the US merely entering an elevated inflation period, we now realize that Janet Yellen and the Federal Reserve are so behind the inflation curve, and many other market implication curves, that we probably are staring at a 35% chance of a Hyper-Inflationary period by the time the Federal Reserve realizes that Noise is actually real inflation!

Setting Herself Up to Look Even More Out of Touch with Reality

The surprising thing is that she backed herself into a corner on the data, and I expect the inflation and employment data to keep coming in much hotter and well ahead of the Fed`s own forecasts, and she didn`t even leave herself any real wiggle room. With each new data point she and the Fed are going to look increasingly out of touch and well behind the curve that it is going to be shockingly laughable. If the sky is cloudy gray, and you keep saying that the sky is clear blue, people are going to stop listening to what you have to say, it’s called losing credibility, and the entire institution needs all the credibility they can muster at this most difficult time – the unwinding phase! 

Loss of Credibility Worse than Actual Policy Decisions at this Crucial Monetary Pivot Point

The loss of credibility is by far worse than the actual policy decisions at this point, and after listening to Janet Yellen`s press conference, I am not sure she is a rational, logical, empirical thinking human being with her ridiculous comments regarding the stock market and inflation as she seems borderline senescent and incapable at best, and there is no doubt she is completely over her head at the Fed in this powerful position. I cannot wait to hear the Fed minutes of this latest Fed Meeting!

Markets will Dictate Policy for the Fed!

There is no hope for an elegant exit now from this monetary experiment, inflation will be at 4.5% before they even start raising rates! The bond market will be so far ahead of the Federal Reserve in terms of bond vigilantism that they are what will bring the Fed to finally realize that they have lost control of financial markets, and then it is endgame for interest rates! 

Once the bond vigilantes take control of markets because they have no faith in the Federal Reserve, it is time to seriously reevaluate what the makeup and role the Federal Reserve should play in future monetary decisions going forward! 

At this point we need a major overhaul regarding the powers of the Federal Reserve, if after the last Fed inspired bubble, where everybody made a note of the responsibility of not creating future “bubbly conditions” and with what I would called unsustainable artificial prices in many asset classes, it is obvious that the institution has no proper checks and balances and needs a major constitutional overhaul! 

P.S. Final thought: 
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