Bernanke Goes All In

January 26, 2025 By 1 Comment
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Well, we got an inflation target from the Fed. Basically, thinking at the Fed has been eliminated. The process has been automated. Bernanke has convinced the Fed board to adopt Core PCE as a determinate of monetary policy. So long as CPCE stays below 2%, Ben is going to have his foot planted on the monetary metal. It’s “full speed ahead” according to the Chairman. He’s pushed things off until 2014 - a very long time from now.

My question: “Why is the Fed using CPCE versus another measure of inflation?” The very good news is that there is answer, and it comes from a very “reliable’ source – The Federal Reserve. A detailed analysis on this topic was conveniently made public just a month ago.

Alan Detmeister produced a doosey of a report. Ya gotta love the title page:

This beast runs 25 pages, it includes tons of charts and references. It compares the utility of using Core PCE to a dozen other inflation yardsticks. There are easy-to-understand formulas to support the conclusion:

Guess what? Good old Alan makes a compelling argument. Anyone who tries to question the use of CPCE is going to get hit over the head with this report. This is just one of the many charts that prove (according to Detmeister) that CPCE is the only way to go when considering monetary policy:

There’s just one teeny problem with Alan’s work. He did all of that comparing and studying using data from pre-2010. Using that information, CPCE lines up very well as a
consistent barometer of inflation. But the analysis falls to shit when you look beyond 2009. CPCE took a nose-dive after 2009 (versus CPI and Core CPI):

Information on CPCE and the other measures of inflation is available monthly. There’s no reason (that I can think of) why the Fed chose to deliberately omit two years of data
that would conflict with the “desired’ conclusion. To me, it looks like the authors manipulated the report.

I think the Fed made a mistake targeting inflation. It’s now stuck with the choice. It can’t go back on this without looking awfully stupid. The policy of allowing CPCE to determine the direction of monetary policy will last the until the end of Bernanke’s term at the Fed. Then it will be abandoned in favor of more pragmatic approaches to decision making.

I think there is enough monetary juice in the global system for there to be a risk of inflation north of 2%. We shall see. I think Bernanke is going to get his balls squeezed. He deserves that fate, he put them in a vise. As of today, he no longer has choices. He’s made himself a slave to a single dopey statistic.

The markets are the best measures of how people perceived today’s announcements from the Fed. The dollar pissed on the Fed in general, the gold market hit Bernanke square in the face with an ingot.

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About Bruce Krasting

I’ve been writing for the professional press for the last five years and have been on the Fox Business channel several times as a guest describing my written work. In January 2009, I started writing my blog Bruce Krasting (http://brucekrasting.blogspot.com). From 1990-1995 I ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. We expressed our views in global bonds, currencies, stocks, commodities and derivatives. I closed the fund and retired in 1995. I’ve also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp. I hold a bachelor’s degree in economics from Ithaca College and currently live in Westchester, NY.

  • Alan Detmeister

    Bruce,

    Thanks for the link to my working paper, a couple of comments about this post though:

    1. This paper doesn’t address your question of whether the Fed should target PCE inflation or CPI inflation. It only examines different constructs of “core” PCE inflation (such as excluding food and energy. the trimmed mean, variance weighting, and a few others along with Michigan inflation expectations) and ask the question: are they useful in predicting future inflation or tracking the current rate of inflation purged of transitory noise. I find they are. Among the best are the trimmed mean inflation rate over the past 9 or so months, but you could also use a 24-month (or so) moving of overall PCE inflation.

    2. The current PCE inflation rate used in the paper stops in 2009 so that benchmarks could be constructed to compare it to. The centered 36-month moving average of overall PCE inflation that you show the figure above needs 18 months before and after the current month to be constructed. Another benchmark used in the paper (overall PCE in the 12 months after the next 12 months) requires 24 months of data after the last observation of “current” PCE inflation for construction. Overall I used the most recent sample as I could given the need for data to construct benchmarks (and the few week lag between when I ran the analysis and the release of the working paper).

    3. In the figure you show above a merging of the lines is not important. The level is what matters in this figure. It shows that the error in matching a centered 36-month moving average of overall PCE inflation are generally lower when using some measure of “core” inflation (where “core” is broadly interpreted) than when using overall PCE inflation. The trimmed mean (the green line), Michigan 12-month ahead inflation expectations (the blue line), and PCE inflation excluding food and energy (the red line) all tend to have lower errors at tracking a long centered moving average of overall PCE inflation than does a short backward-looking moving average of overall PCE inflation (the black line).

    4. The length of the equation you show is partly as a result of typing out things like “unemployment rate” and “nairu” and “imports”. I find it more convenient to understand an equation when those are spelled out rather than using u, u*, and i, etc, as is often done in economic papers. The rest of the equation is simply a linear regression.

    If you have any other thoughts on the paper, feel free to let me know.

    Alan

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