More Dovish Than Fed’s Evans

That would be, drumroll please, Chicago Fed President Charles Evans, again. This is via MarketWatch:

In a speech to the C.D. Howe Institute, an independent not-for-profit economic research firm based in Toronto, Evans said policy makers should vow low rates until unemployment falls below 6.5%, as long as inflation is not forecast to rise above 2.5%.

He says that 7% threshold now seems “too conservative.”, and, we concur. The US economy may be recovering gradually, the persistent high unemployment remains a big cause for concern. And, although, global economy is a-okay at the moment, it is placed very precariously. Also, the global-growth-engines status of major emerging economies is still kind of justified, they cannot continue to pull the world ahead without significant help from the ‘old growth-engine’, the USA, now that her usual sidekick, Europe, is going to be AWOL for considerable future.

Evans also notes that even with a policy stance like the one he suggested, Fed will have many course correction opportunities that it could avail.

“If we continue to have few concerns about inflation along the path to a stronger recovery, there would be no reason to undo the positive effects of these policy actions prematurely just because the unemployment rate hits 6.9%,” he said.

Not that he is concerned that inflation will trump unemployment concern soon. Adding:

“We’re much more likely to reach the 6.5% unemployment threshold before inflation begins to approach even a modest number like 2.5%,” he said.

The market is also agreeing as it does not seem to be fearing any rise in inflation in the near future. Here is the weekly chart of 30-year treasury yields, which is trading at the near all-time low and is showing no sign of getting off that level. From 2002 to 2008, when the unemployment was sub-5%, the yields fluctuated between 5.4%-to-4.14%. Today it is it is around 2.79%.

The annual inflation – annual change in CPI – during this period was, also, not very high. For most part it fluctuated between 1% and 3%. Presently it is around 2%.

The Goldman Sachs Commodity Index (GSCI) is also not showing runaway prices for commodities. It fact it is stuck in a descending triangle, which is a bearish chart pattern. If the pattern holds true to its usual intent then a breakdown in commodities prices will indicate deflation and not inflation.





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