Is money easy? (low CPI edition)

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THe FOMC concludes a two-day meeting on 1 May (NY time).  There is, however, little chance that the FOMC will take a further step toward tapering (the minutes to their last meeting showed a movement in this direction).

Yes, there has been a bit of soft data (after the Chicago PMI -3.4pts to 49 in April, a sub-50 ISM looks possible — and yes the US slowdown does pressure my on hold RBA call for May), but that’s not the main reason.

The main reason is that inflation is low — and is falling.  The opponents of the current crop of global easy money policies have some (difficult) explaining to do — pretty much everyone agrees that easy money makes inflation too high … well, right now it’s way too low.


The ex-food ex-fuel measure the FOMC prefers is running at ~1.1% AR over the past 3m, 6m and 12m periods. The last two times it got this low the FOMC eased further.


I prefer the Trimmed mean measure, and this is ~1.3% AR over the 6m (and ~1.4% AR over the past 3m and 12m).  That’s still too low when the target is 2% — and especially so given that growth is slowing.


    1. Nothing about the taylor rule says it is optimal at all times to meet the rule — but i agree with you, it seems policy remains too tight in the US. Inflation is too low and growth is too slow.

  1. Quality counts and besides this complements Mark Thoma’s piece (which includes Kruggers) or should I say they complement your piece well!!

  2. I started reading the book from the “Austrian” school I mentioned yesterday and in the first chapter they are clearly saying that prices are a direct function of money supply but indirect function of demand for money, if I understood correctly!…. demand for money is very high in the US right now, and not only in the US, it is world-wide. So money supply can’t effect prices enough. But, but, but. This is unprecedented monetary policy, it’s easy to say policy is too tight without addressing future consequences. It’s very risky territory and the last thing we need is a new bubble…. sometimes patience is a better option. For instance it looks like housing may be recovering finally, and that would be very good. Then if that happens, I am sure the Fed will be happy to have less to undo, an easier exit. I do not expect major policy changes until the new boss who will replace Bernanke in is.

    1. I think the money the Austrians are talking about is more like folding cash, rather than electronic reserve money.

      I do not think it is right to say money demand is high – reserves are preferred to new loans, as the expected returns (yep at 25bps) are higher. Given this fact, the reserve balances are a consequence of the fed’s OMOs – a residual if you like.

      1. In this paper I am reading they were referring to “demand for money” in the sense of how much people would be willing to give up for their money; it’s referred to as how much money they would like to keep in their cash balance rather than spending. The author was comparing the supply / demand / price of a product to supply of money / demand for money / purchasing power and price levels and how these are all correlated. The model fits the current situation in the US where expanding the money supply is met by increased demand for money, since the balance sheet of many people are broken after the credit bubble and must be rebuilt. To be honest I think the US will go the way Japan did and will not have an inflation problem for a long time also because technology and China are making the supply side very efficient and we can satisfy internal demand quite easily. Only if China is able to stimulate internal demand and inflation this may change but I do not see that happening for a while. So rates are going to stay low for a while and Australian rates will go lower where they have never being before.

  3. Good news for more imported deflation and consumers in general.

    “Woolworths Ltd has established a team to expand its parallel importing of products from international locations in order to reduce prices, The Australian Financial Review reports.

    According to the newspaper, Woolworths will push on with the practice, despite being met with resistance from Anglo-Dutch grocery giant Unilver, which discovered the local chain has been buying Australian-made Lynx, Rexona and Impulse deodorants from Singapore for 60 to 75 per cent of the price it pays locally.

    Woolworths, which has accused suppliers of earning excessive profits in Australia by charging local retailers higher wholesale prices than they charge offshore buyers, is now threatening to source more products from overseas through parallel import channels unless suppliers cut the price differential or provide more transparency, according to the AFR.”

    1. Manufacturing has finally collapsed.

      Who cares, AUD goes higher!

    1. Very interesting article on Sweden, thank you.

      After reading so many articles from economists, central bankers, etc on what should be done to manage the economy properly, a question comes naturally: where were they all during the biggest credit bubble ever, before the GFC, how did they lead the world economy into this mess, and why should people listen to them now? Couldn’t they prevent it (probably not), and why would they do better now. Basically monetary policy can’t be a substitute for growth. It can facilitate it, but there’s a limit, like the extension of an elastic band. I think you can understand the unease of common people when economists seems to want to keep “playing” with money.

  4. Yes, money is way too tight even if the Fed doesn’t care for level targeting and places no weight on the other side of its mandate.

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