Fed's Operation Twist Goes The Wrong Way! CPI Declines

Confounded Interest ^ | 12/14/2012 | Anthony B. Sanders

[whitedog57]

The Fed’s Operation Twist was intended to lower long-term interest rates while raising short-term interest rates. But notice that it has worked exactly the opposite. Notice that the yield curve has actually increased in slope over time at the critical Twist dates.

With Industrial Production increasing by 1.1% in November (Sandy recovery efforts), it is possible that The Fed will take its foot off the accelerator. On the other hand, capacity utilization has not reached 80% since the Great Recession ended in June 2009. The Fed likes to keep their foot on the accelerator until capacity utilization exceeds 80%, THEN back off.

Now, while industrial production rose by 1.1% in November, it had fallen by -1.0% in October. So, the average growth in industrial production over October and November was only +0.05%.

The Fed is likely unhappy about the Consumer Price Index (CPI) printing at -0.3% in November. The Fed is trying to fight deflation by inducing inflation. Given declining energy prices, inflation is actually lower than where The Fed would like it to be (but not by much).

While there will be speculation that The Fed will takes its enormous foot off the monetary accelerator pedal, I sincerely doubt that it will. Unemployment is still painfully high.

On the other hand, the M1 Money Multiplier and M2 Money Velocity indicate that further Fed action will not be effective.

Wrong way, Ben?

[whitedog57]

Fed policy is backfiring. And the economy is sucking wind.

[PGalt]

“Where gonna keep on twistin’...’till we tear the house down...”

http://www.youtube.com/watch?v=xbK0C9AYMd8

Eliminate the chubby FED.

[ABQHispConservative]

Fed’s policy will make everything worse. Assuming we are coming out of the recession, as the media tells us all the time, we will go back into it thanks to the rampant inflation these idiots are creating. Too much money in the system to keep interest rates down.

[KarlInOhio]

The Fed is likely unhappy about the Consumer Price Index (CPI) printing at -0.3% in November.

Watch the CPI shell game in action. There are two primary CPI figures reported: the total CPI and the core CPI eliminating energy and food. In November the total CPI as -0.3% and the core CPI was +0.1%, so the smaller of the two is focused on. When energy prices go up, the core CPI is the smaller one so it is put in the front.

[Pecos]

Dems. Clueless about what makes an economy run better. What a surprise. And the fact that the CPI no longer includes the cost of food or energy doesn't make the problem any more solvable.

[KarlInOhio]

And the fact that the CPI no longer includes the cost of food or energy doesn't make the problem any more solvable.

They publish two main CPI figures. One includes food and energy and the other "core" one doesn't. The drop in gasoline prices in November (down to $3.179 in Dayton today) is why there was a negative total CPI but a positive "core" CPI in November. I expect something similar in December unless gas prices climb again in the second half of the month.

Neither really matches with what I've been seeing recently.