Here’s Why Bogus CPI Data Won’t Slow Fed Tightening

Daily Reckoning

By Lee Adler

WSJ consumer prices

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[This post on Here’s Why Bogus CPI Data Won’t Slow Fed Tightening is from Lee Adler. To find out more about his work – visit Wall Street Examiner.]

One of my other favorite axioms is that bull markets (or “bubbles,” if you please) top out when the news is good, not when everything is already going to hell. Because when the news is good is when central banks pull the punchbowl. They look at the data and see the evidence of asset inflation and dangerous bubbles across many asset classes. And they finally say, “OK, I think you’ve had enough!”

Then, given their inflated notion of their own omnipotence, they set about to engineer a soft landing. The desired soft landing inevitably turns into a vicious bear market that threatens to spiral out of control. The central bankers panic and start pumping money like mad, and if they’re lucky, the markets rebound.

This has been the market cycle ever since modern central banks were formed. Along the way central bankers learned that they could rig the markets to extend the bull phases by printing lots of money. But they also learned that not only doesn’t that spur economic growth, it may even retard healthy economic expansion.

So far, they have always been lucky.

One of these days, Alice, they won’t be.

Last week we got the news on various measures of the prices of consumption goods, led by the consumer price index (CPI). Wall Street, economists, and the financial infomercial media like to pretend that CPI measures inflation. We know that it only measures a tiny arbitrary subset of consumption goods, and a completely phony, made up lie on the cost of housing.

Despite that fact that it does not measure general inflation and doesn’t even accurately measure the typical household cost of living, virtually everyone in the investment business pays homage to it. Then they compare it to the Fed’s “inflation target.” Never mind that everybody excludes asset prices and home prices. The “inflation” target only applies to retail goods and services.

Then everyone waits with bated breath to see whether the number is above or below the Fed’s “inflation” target of 2%. If around or above that level, the conclusion is that the Fed will raise interest rates, which everyone assumes is bearish. Or if the number is below 2%, the Fed won’t raise rates, and that’s supposed to be bullish.

The whole spectacle is absurd because the underlying assumptions are false.

“Raising rates” using the tools the Fed currently pretends to use, is not the same as tightening credit. Increasing the interest rate on excess reserves only pays the banks a bigger subsidy. Tightening credit would necessarily involve shrinking the Fed’s balance sheet. They haven’t done it yet, but they’re talking about it starting soon. CPI above 2% will encourage them to do that.

When I read the FOMC meeting minutes, and see what …read more

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