Tuesday, September 13, 2016

What The New York Fed Just Said About Inflation

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*We're looking for clues ahead of the Fed's September 21 decision.
*The New York Fed president is said to be close to Fed Chair Janet Yellen.
*The New York Fed district just reported the highest level of inflation expectations for the year.
*We've been saying, even after Fed Governor Brainard's speech, a rate hike is on the table.
*An unexpected rate hike would likely crush markets.

Like other Federal Reserve districts, the New York Fed conducts many surveys and produces much analysis. They just completed their monthly work, which includes an important inflation expectations survey. Other than the PCE price index the Fed constantly calls out "inflation expectations." It is a key Fed measure. This measure just hit a new high for 2016. That will be top of mind going into their September 21 decision. We think a rate hike is very much "on the table." If it is the case that the Fed does raise rates it will be a market shock and send markets (SPYQQQ) spinning.
We'd like to start with the last FOMC minutes to show you where we stand on "inflation expectations."
Here's what they said in their last minutes.
Staff Economic Outlook: The risks to the projection for inflation were still judged as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged lower.
Measures of inflation expectations were little changed yet the risk to inflation was to the "downside" because "longer-term inflation expectations may have edged lower."
The Fed is close-to or at their congressional mandate for full employment. They are near their 2% inflation mandate with PCE at 1.6%. The risk to that inflation mandate though is "longer-term inflation expectations may have edged lower."
What if we were to tell you the main risk to not meeting their mandates is turning back up? The risk of not meeting both mandates simultaneously would disappear. Removing that last risk (according to the last FOMC minutes) would give the Fed a clear path to arrive at both their jobs mandate and their inflation mandate.
Let's Turn To The New York Fed Survey Just Released Yesterday.
Now that we have totally set you up to be interested to know how the one clear remaining risk to their mandate is doing, we'll show you.
But First The Setup

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