Taper Tantrum: The Fed, Inflation, Unemployment and House Prices

Confounded Interest ^ | 12/15/2013 | Anthony B. Sanders

[whitedog57]

The Federal Reserve Open Market Committee meets on Tuesday and Wednesday of this week. To taper or not to taper, that is the question.

Hamlet-to-be-or-not-to-be3

Let’s take a look at inflation thus far. Since 1947, there have been only three periods of deflation where the consumer price index (CPI) has fallen for consecutive months: 1949-1950, 1954-1955 and most recently, 2009.

inflationcpi121413

Notice that inflation (as defined by year–over-year changes in the consumer price index) has been declining since September 1981 when inflation hit 11%. The latest measure of inflation is 0.9% YoY for October 2013.

At the same time, house prices (as measured by the year-over-year growth in the Case-Shiller 10 City index) shows the variability of house price growth compared to inflation. And with inflation declining over time, is house price growth sustainable?

infcs10

Of course, real median household income has been falling since 2000 consistent with declining inflation.

realmedinf

From The Fed’s viewpoint, inflation is signaling no problem with unorthodox Fed monetary policy … at least for now. But with real asset inflation, like housing, signaling “bubbles” to The Fed, they may take defensive action. So, it may be time to begin tapering the massive Fed purchases of $85 billion per month.

The good news is that unemployment is falling towards the 6.5% target unemployment rate. Unfortunately, labor force participation (purple) is falling as well. And there is little that The Fed can do about it.

unemplfp2013

I will be surprised if The Fed actually tapers this week, unless it is a tiny trial balloon to test the markets reaction. They might test for a “taper tantrum” from markets to a withdrawal of monetary stimulus.

For music fans (like me), here is my nephew Andrew Ockenden playing with his band Twin Wave at the 2013 O Music Awards in New York City. Andrew in the bass player on the right.

[whitedog57]

Let's see if the Fed tapers. betting no.

[nascarnation]

I think the party at Ben & Janet’s will continue.

I think most of the “progress” on unemployment is due to part timers being hired to supplement full timers being demoted to 29ers to avoid Obamacare.

[humblegunner]

Let's see if the Fed tapers. betting no.

Will you display your stolen charts?

I'm betting no.

[Bluestocking]

Why did the Federal Reserve announce a specific target of 6.5% unemployment for beginning to taper, except to provide some stability to the financial markets?

With a specific 6.5% figure, investors could at least believe they were making reasonable decisions about their investments. But if the Fed discards its 6.5% tapering standard on a whim, that will destroy the Fed’s credibility on future promises.

Can anyone in Washington be trusted to tell the truth? If not, we’re no more stable than a banana republic, and we’ll soon have high banana-republic-type interest rates no matter what the Fed decides to do, because investors will demand a premium for buying our bonds, having concluded that our leaders are no more trustworthy than snake-oil salesmen.

[familyop]

Several times recently, propaganda releases have erroneously/disonestly stated that the Fed would “taper,” stop QE, stop buying bonds, etc. It didn’t happen any of those times. They’re trying to drive foreign currencies and freight down to continue importing much.

[BfloGuy]

With a specific 6.5% figure, investors could at least believe they were making reasonable decisions about their investments.

I don't think investors have been able to make reasonable decisions about their investments in years. Interest rates are the price signals of investment. The Fed has been fixing those prices.

We're all flying blind; just attempting to outguess the Federales.

[Lurkina.n.Learnin]

bump for later.