Wednesday, March 18, 2009
Today's turn of events presents a story of sorts.
1. The BLS released the February Consumer Price Index (used to measure inflation). The highlight of the report is that inflation got a bounce to remain above zero over the year, 0.2%, and core inflation (ex food and energy prices) also rose 1.8% over the year. According to the BLS:
2. Economists react to the news, but with very different takes. From the WSJ Real Time Economics blog:
For a while, some analysts were actually worried about deflation. I think we can pretty much put that puppy to bed. At the same time, rising prices are hardly a threat. Where firms, other than oil companies, think they can find pricing power in this slowdown is beyond me. Thus, this report indicates that at least for now, the Fed can focus strictly on the financial sector with minimal near-term concerns about inflation. –Naroff Economic Advisors
Even with energy prices having flattened out of late, the deflation risk confronting the U.S. economy is real. Moreover, unless there is a powerful V-shaped recovery — which we deem highly unlikely — it is going to be several years before there is any legitimate reason to be concerned about a resumption of inflation risk. –David Greenlaw, Morgan Stanley
RW: I saw David Greenlaw give a talk last week in New York, and let me say, I agree with him. Inflation, both core and headline, will fall further, as the massive economic contraction currently underway seeps into prices at a lag. It is likely that we will see several months of negative inflation; however, that is not necessarily cause for worry, except for the economic slack - i.e., the elevated unemployment rate and output gap - is quite real. Falling prices raises purchasing power, which can be a good thing in bad economic times.
3. And then the Fed pulled out the big guns with a massive expansion of the MBS purchase program ($750 billion in addition to its previous limit of $500 billion), alongside an official announcement to purchase $300 billion in Treasuries over the near term (i.e., monetize the debt in order to drive interest rates down).
Clearly, the Fed believes that there is still some stimulus to be had in its alternative measures - longer term rates fall to grow consumer and firm spending. Today the Fed said that further aggressive monetary action is needed, no matter what is the monthly inflation trajectory.
According to the NY Fed, the Treasury purchase will span the 2-yr to 10-yr yield curve.
Interesting times, indeed. Rebecca Wilder