Duck And Run - The Robot Doth Blather

Listening to Janet Yellen splitting hairs and blathering in circles about the state of the economy yesterday was enough to put you in mind of a paint-by-the-numbers robot built in the labs at MIT and programmed by its Keynesian economics department. After all, the latter has also inflicted on the world Paul Samuelson, Stanley Fischer, and his infamous student, Ben Bernanke.

So why not a four-fer?

There is only one question that Yellen needs to answer and then all else is readily explained. To wit, does she actually believe that the money market rate - as formerly measured by Fed funds before Bernanke nationalized the interbank market in September 2008 - is a wholly owned property of the FOMC?

Or does the overnight rate possibly have some measure of significance as a “price” in the financial system? And one that, in fact, is linked to the rest of the so-called yield curve, and from there to converts, equities, options/derivatives and the whole of the price discovery process in the money and capital markets.

Less than a decade ago almost every financially literate person knew the Fed funds rate - even if increasingly massaged by the FOMC - was a financial price and that it transmitted market signals throughout the financial system. So consider the implications of the Fed’s decision to keep it pinned to the zero bound for what will soon be 96 months running.

In a word, Yellen and her posse of Keynesian monetary central planners are apparently willing to drastically falsify the price of money and all that derives from it - such as the bond market carry trades and the massive churning in the options pits - on a virtually permanent basis.

And for what purported macroeconomic gains?

In a word, to achieve hairline increases in the inflation rate, when there is already too much inflation; and to nudge unspecified reductions in the US labor market’s “slack”, when the latter is almost surely beyond the reach of monetary policy in any event.

Stated differently, Yellen proved again yesterday - and painfully so if you were watching her presser - that she is so robotically focussed on achieving fractional decimal points on the Fed’s so-called Humphrey-Hawkins “mandates” that she can’t see the forest for the trees.

The fact is, ZIRP is planting multi-trillion dollar FEDs (financial explosive devices) throughout the entire financial system. Yet the FOMC majority still claims that there are no bubbles in sight.

Thus, the Yellen Fed is embracing giant financial risks for pure macroeconomic trivia. For instance, even if you assume that 2.00% inflation is some kind of magic economic elixir, how in the world can the denizens of the Eccles Building not admit that they are already there or certainly damn close?

The regular CPI adjusted for market rents - rather than the BLS’ specious measure of OER (owners’ equivalent rents) - was up 4.5% in the most recent year, and 2.4% since 2010. Likewise, the PPI for finished consumer goods is well above the Fed’s 2.00% target on a one-year and five-year basis, as is the core CPI.

Even the core PCE - the Fed’s absolute favorite measuring stick - was up by1.6% on a Y/Y basis at the last reading. Isn’t that close enough for government work?

Indeed, the only price gauge that is “undershooting” the Fed’s inflation target is the headline CPI and there is absolutely no mystery as to why. To wit, the August CPI report showed that energy commodity prices were down17.3% from prior year, while the CPI less food and energy was up by 2.3%.

In fact, if the Fed is eager for the tonic of inflation, there is plenty of it about. For example, services less energy were up 3.2%, medical care was higher by 5.1%, asking rents were up 5.6%, prescription drugs by 6.3% and health insurance by more than 9%.