Changes in US monetary policy over the last decade have potential implications for investors and their inflation expectations, said Taeyoung Doh, senior economist, and Amy Oksol, both of the Kansas City Federal Reserve, in a study released Tuesday.
During the financial crisis and Great Recession of 2007–09, the Federal Reserve’s conventional policy tool, the nominal short-term interest rate, was constrained by its effective lower bound of zero, Doh and Oksol said. At the time, monetary policy makers were concerned the US economy might slip into a deflationary trap similar to Japan’s from 1999–2003.
CONTROL EFFORTS
As a result, the Fed responded aggressively to stabilize the economy through multiple rounds of Large-Scale Asset Purchases and forward guidance on the future interest rate, they said. The Federal Open Market Committee also adopted a formal inflation target at its meeting in January 2012, emphasizing that “communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored.”
Well-anchored inflation expectations are a key measure of successful monetary policy, the pair said, because in the long run, inflation is mainly determined by monetary policy.
Inflation expectations drifting away from the central bank’s inflation targets can generate highly inflationary or disinflationary episodes, Doh and Oksol said. For example, businesses expecting a higher inflation rate may increase current prices to offset high future costs of production.
Similarly, consumers expecting prices to fall, may delay spending, reinforcing disinflationary pressures with the lack of demand, they said.
INFLATION EXPECTATIONS REBOUND
Prior to the financial crisis, researchers found that the level and volatility of inflation expectations decreased dramatically from Q3 1981 to Q2 2008, suggesting investors’ inflation expectations were well anchored the pair said. But did their expectations remain anchored after the crisis, during a period of unconventional monetary policy?
Analysis of three metrics of inflation expectations — their level, volatility and persistence — suggested the degree of anchoring deteriorated somewhat in late 2010, coinciding with the start of the second round of LSAPs but has improved since then, they said.
Other rounds of LSAPs and the adoption of a formal inflation target are associated with better anchoring of inflation expectations to varying degrees, Doh and Oksol said.
Finally, they found inflation expectations have remained well anchored more recently (2017:Q3), returning to pre-crisis behavior.
DEGREE OF INFLATION ANCHORING EXPECTATIONS
If the level of inflation expectations gets closer to the central bank’s longer-run objective, then inflation expectations are better anchored, they said. If the volatility of inflation expectations declines, then inflation expectations also are better anchored.
And, if unanticipated shocks to inflation expectations have less persistent effects over the long run, then inflation expectations are better anchored.
The metrics were consistent with the FOMC’s interpretation of price stability in terms of “preventing persistent deviations of inflation from its longer-run objective,” Doh and Oksol said.
CATTLE, BEEF RECAP
Only 126 head of fed cattle sold last Wednesday on the Livestock Exchange video auction at $126 per cwt.
Cash sales last week in the Plains were at $126.17 to $127 per cwt on a live basis, mostly $126, mostly steady to up $1 from the previous week, and a steady $200 on a dressed basis.
The USDA’s choice cutout Tuesday was down $0.88 per cwt at $207.36, while select was off $0.84 at $203.13. The choice/select spread narrowed to $4.23 from $4.27 with 94 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Monday, was $147.57 per cwt, down $0.06. This compares with Tuesday’s Mar settlement of $147.27, down $0.40.