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Fed Violates its Own Inflation Targets. Should QE3 Be Postponed?


At this year’s Jackson Hole symposium, Ben Bernanke promised to help the economy via further easing if  needed. We doubt his promises because because the Fed might contradict their inflation targets. Current levels of around 2 % for the consumer price inflation excluding food and energy (“core CPI“) and the deflator of the GDP component “Personal Consumption Expenditure” excluding food and energy (“core PCE”), the main Fed indicators, do not justify any further Quantitative Easing (QE).

We expect the Fed not to ease before the core PCE has gone down to levels of 1.3%. This level was seen in September 2010, when Quantitative Easing 2 was started. Another indicator, the five-year inflation expectation, is stable and not falling to levels seen when QE1 and QE2 were initiated.


In the meantime we have elaborated the following more detailed and updated posts:


Who is dove, who is hawk inside the Fed?

Which are the Fed’s QE indicators and how is this related to gold and the Swiss franc?


The following is our detailed estimation of August 2012, where we wondered why the Fed could introduce QE3 despite a potential violation of their inflation targets.

Hawks are back in 2013 and 2014. Core inflation too high. QE3 postponed to 2015 ?

Goldman Sachs is expecting further easing for the end of the year 2012 or in 2013. In 2012 the hawks are not members of the Federal Open Market Committee (FOMC). Unfortunately for Goldman these hawks will be alternate members of the FOMC in 2013, i.e. being able to contribute actively in each FOMC meeting but not to vote. In 2014 they will be even voting members.

With money flows from emerging markets directed to the United States we do not see core PCE to decrease that quickly. A fall of 0.7% for core inflation in one year is only possible in a severe recession. In 2014 the hawks might vote down QE3 attempts. Therefore we expect QE3 not to happen before 2015. But till then the American economy (or at least inflation) may have slowly recovered even without the Fed’s miracles.


Goldman Sachs’ QE3 bet

Goldman Sachs still thinks that Quantative Easing is possible in times of relatively high core inflation. It says:

 “The recent news on the pace of the recovery also has implications for Federal Reserve policy. To be clear, our own view remains that there is a very solid case for additional accommodation under the Fed’s dual mandate of maximum employment and 2% inflation. And we do believe that Fed officials will ultimately decide to ease policy further.” (source)

We understand their reasoning, they want to sell their oil and gas derivatives…. but at the end Goldman pulled the plug on more easing, at least for now. By 2013 they think it could be different (source Zerohedge).

The Fed knows well that new Quantitative Easing might probably end in a strong rise of food and commodities. Therefore they exclude a priori food and energy inflation from their Quantitative Easing target, even if Goldman wants to see it inside. Currently core CPI stands at +2.1% YoY. Energy is down 5% YoY, but QE3 could quickly change that and inflation could then get far beyond the Fed’s target of 2%.


The SNB will be happy, but…

The main drivers for demand for Swiss francs are the euro crisis and even more the behavior of American investors, who go out of the dollar to escape further bad US economic data and in the fear of Quantitative Easing. QE would push down the dollar and pull safe-havens like the CHF, gold or the Japanese Yen upwards.

The SNB will be happy if QE3 will not come that soon….

Nontheless, US inflation and no rate hikes together with a continuing euro crisis is still a problem for the SNB.


Current FOMC voting members and their opinions

In the following we will examine who in the Federal Open Market Committee (“FOMC” or often commonly used “Fed”) is a dove, who a hawk or who a middle/centrist (source WSJ and Katie Lien and the following graph from Thompson-Reuters).


Fed dove-hawk scale (Reuters)

Fed dove-hawk scale (source Thompson-Reuters) - Click to enlarge


Dividing theFOMC into groups

This division into groups comes from Berkeley’s Prof DeLong type pad.

Daedalos: I would start by dividing the potential voting members of the Federal Open Market Committee into several groups. The first group is made up of Elizabeth Duke, Jerome Powell, and Esther George. The second group is made up of Dan Tarullo, Sarah Bloom Raskin, Sandra Pianalto, and Dennis Lockhart. The third group is made up of Eric Rosengren, Charles Evans, and John Williams. The fourth group is made up of Jeffrey Lacker, Charles Plosser, James Bullard, Narayana Kocherlakota, and Richard Fisher. And the fifth group is made up of Ben Bernanke, Janet Yellen, Jeremy Stein, and William Dudley.

The first group are financial-sector worthies with a bias toward inaction and not rocking boats, but willing to go along with strong views from elsewhere on the committee. The second group are those without strong monetary policy opinions of their own who are distressed by the current situation and willing to engage in boat-rocking if they can be convinced it would be constructive.

The third group–Rosengren, Evans, and Williams–think like we do.

The fourth group–it is not at all clear to me right now that the fourth group “think” at all. …

Kurush: OK. I get it. The fifth group?

Daedalos: The fifth group–Bernanke, Yellen, Stein, and Dudley–are, or ought to be, the deciders here. They have deep knowledge of and strong substantive views about monetary policy. They are not reputationally bankrupt and thus gambling for reputational resurrection.

Hence we obtain 5 groups.

  1. Bias towards inaction
  2. Group that needs to be convinced by others in order to implement easing
  3. Strong proponents of easing
  4. Hawks
  5. The deciders…

The FOMC composition


The voting majority of the FOMC consists of the seven votes of the Fed’s board of governors and the five votes coming from Reserve Bank presidents. The governors are determined by the US president and the US senate.

The followings are the voting members of the Fed, their general stance and their opinion uttered as of June 2012. With a stronger housing market since June and rents up 2.8% YoY, the opinions might be even less favorable for QE3 now. For the group definitions see at bit further below.

The Board of governors
  • Ben Bernanke, Chairman of the board: middle/leaning dove, Group 5 (decider), bio.
  • Janet Yellen, Vice Chair of the board: strong dove, Group 5 (decider), Easing yes, opinionbio
  • Elizabeth Duke, board of governors: Group1 (inaction), Middle/leaning dove, opinion: QE3: no, her bio
  • Daniel Tarullo, board of governors : dove, Group 2 (to be convinced), bio
  • Sarah Bloom Raskin, board of governors:  leaning dove, Group 2 (to be convinced), bio

The following previously two empty seats were filled in 2012, when Obama and the Senate found a compromise between democrats and republicans. Maybe because of the Powell’s support of the debt ceiling in the bipartisan center, the Wall Street Journal takes both Powell and Stein for leaning doves. The Washington Post thinks:

I doubt anyone knows where Powell & Stein are on the hawk/dove spectrum. But both are smart & neither is doctrinaire, which is a good start.

  • Jerome Powell, board of governors, Republican, Group1 (inaction), bio
  • Jeremy C. Stein: board of governors, Democrat, rather dove, Group 5 (decider), bio
Members as Federal Reserve presidents
  • William Dudley, New York: dove, Group 5 (decider), opinionbio
  • Dennis Lockhart, Atlanta:  Middle/Leaning dove, Group 2 (to be convinced),  Easing yes, opinionbio
  • Sandra Pianalto, Cleveland: Group 2 (to be convinced), Easing no: her opinion, but she was leaning dove before, bio
  • John Williams, San Francisco: dove, Group 3 (easing proponent),   opinionbio
  • Jeffrey Lacker, Richmond: hawk, Group 4 (hawks), Easing no, opinionbio
Alternate Members (not voting)


In summary the board is currently a bit more dovish than hawkish. When enough hawks are among the Federal Reserve presidents, they can convince the board. Some formerly dovish members might have become more hawkish (e.g. Pianalto), given that the Fed has finally recognized the concept of balance sheet recessions.

Federal Reserve Bank Rotation in the FOMC and Hawks


Fisher Kocherlakota Plosser Evans


Hawks like Kocherlakota (Minneapolis), Fisher (Dallas), Plosser (Philadelphia) (see to the right together with the dove Evans) are neither voting nor non-voting (alternate) members in 2012.

“Committee membership changes at the first regularly scheduled meeting of the year” (source Fed).






MembersNew York (dove)
Boston (dove)
Chicago (dove)
St. Louis (middle)
Kansas City (hawk?)
New York (dove)
Cleveland (middle)
Philadelphia (hawk)
Dallas (hawk)
Minneapolis (hawk)
New York (dove)
Chicago (dove)
Richmond (hawk)
Atlanta (middle)
San Francisco (dove)
Alternate MembersNew York VP (?)
Cleveland (middle)
Philadelphia (hawk)
Dallas (hawk)
Minneapolis (hawk)
New York VP (?)
Chicago (dove)
Richmond (hawk)
Atlanta (middle)
San Francisco (dove)
New York VP (?)
Cleveland (middle)
Boston (dove)
St. Louis (middle)
Kansas City (hawk?)
(source Fed).



QE Indicators: Core PCE and Core CPI


For the Fed the most important indicator is the deflator of the GDP component “Personal Consumption Expenditure” excluding food & energy (Core PCE). The latest data is only provided with the Q2 GDP release. With the Q1 GDP the indicator stood  at 2.0%. It was a lot higher than at QE2 time, in September 2010, with 1.3%. A clear indication that QE3 is not imminent and Jackson Hole a non-event.

Given that the core consumer price index (core CPI) stands around 2% for months, the Core PCE should not be a lot smaller than 2.0%. A fall of 0.7% for core inflation in one year is only possible in a severe recession (like seen between 2008 and 2009, see below). More hawks in the FOMC in 2013 and 2014 will prevent further easing at a higher level than 1.3%.

Therefore we think that QE3 won’t come before 2015, if at all…


Core PCE April 2012 FRED

US CPI July 2012 (Source BLS) - Click to enlarge

US CPI July 2012 BLS

US CPI July 2012( Source BLS) - Click to enlarge


Other Quantitative Easing Indicators

A rising gold-crude ratio (MA50) is an indicator for weak global and US growth, disinflation and an upcoming Quantitative Easing. Since May 7 this ratio is increasing. May 7 also coincides with the start of strong inflows into the Swiss franc. Interestingly since the beginning of August the curve has flattened and also the inflows into the Swiss franc.

MA 50 Gold Crude ratio Aug 16, 2012

MA 50 Gold Crude ratio source - Click to enlarge


The Five year, Five year forward, Fed’s Fav represents inflation expectations derived from treasury inflation-procted securities (TIPS). The graph below appeared in the WSJ in June and is compared with Bloomberg data by now. Usually the Fed intervenes when inflation expectations are extremely low. Currently this is not the case.


Fed 5year Inflation Expectations

Fed 5year Inflation Expectations (source Bloomberg) - Click to enlarge



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George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
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