One Man’s Opinion: Have Inflation Expectations Shifted Due To Lower Oil Prices?

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92835431Federal Reserve Chair Janet Yellen may not be as polished as her global counterparts, but she surely managed to get the US central bank’s message across despite the initial reaction that her press conference Thursday was clumsy and messy, said Carl Tannenbaum, chief economist at Northern Trust Corp.

“Patience and to let the economic outlook evolve in a proper manner, patience with what’s going on with the financial markets due to the events in Russia and also patience with her own committee” where there seems to be quite a divergence of opinion – she did a very nice job by saying the Fed remains focused on long-term fundamentals for both inflation and employment in the US; and by those metrics  the choice to begin making small steps towards raising interest rates was the right approach, he noted.

Yellen seemed to suggest the first hike will not take place until June; asked to comment, Carl said she went out of her way to say it won’t occur in the next “couple of meetings” and others on the committee have sort of centered their expectations around the middle of the year.

Of course, there’s a lot that could go on between now and then and chair Yellen took care to explain, as always, the Fed’s decisions are data-dependent. Given some of the uncertainties of the outlook, it’s likely the latter half of the year would be the jumping-off point.

At the same time, markets should not perhaps focus so much on that first-step, but how the rest of the progression will look-like after that. Chairwoman Yellen did a fine job by saying it wouldn’t be the stair-step that was witnessed 10-years ago and the Fed would be very, very cautious and review the consequences of its actions, he observed.

In her press-conference, Janet Yellen observed the decline in oil prices is likely to be net-positive for the US economy. Asked if he would agree that low oil price is a net-positive, but will also not lower inflation expectations, Carl answered on the first front it’s certainly a net-positive for the US where the country has a burgeoning energy-industry of its own, but still do import oil.

For the average consumer this has been a nice benefit during this holiday season and should boost consumer-spending going forward. On the other hand, it’s also fair to say – and the data show it, that falling energy prices are in fact, correlated at least with market-based expectations of lower inflation.

But some of the survey data of consumers and professional forecasters haven’t shown such a big shift in inflation expectations. In fact the Fed’s economic projection show their long-term inflation expectation haven’t changed all that much. The energy markets over the next couple of years will certainly find a new equilibrium and after that price increases should be more normal, he explained.

Bill Gross of Janus Capital has been Yellen’s critic and has said time and again the Fed is not aware of some of the macro factors. Gross recently tweeted during Yellen’s press-conference that Yellen and her Fed seem fixated on models and less sensitive to current leverage, oil prices and global imbalances.

Asked to comment, Carl said oil prices historically have been very, very volatile. In addition, some of the fundamentals that have brought Europe to the brink of deflation are not present in the US. The unemployment rate is much lower in America and wages are starting to rise while costs are certainly at a much more normal level.

The policymakers should be cognizant of these facts, but the Fed should not be overwhelmed by them, he argued.

Asked to comment on Russia’s influence on the US economy, Carl said Fed chair Yellen took care Thursday to note the limited nature of US trade and financial relationships with Russia. However, the Fed should be concerned about the second-order types of effects where Europe is very, very exposed to Russia in some parts and if a contagion begins that way, it could get closer and closer to US shores and potentially affect American financial stability. Something to keep an eye on, he concluded.

You can watch the video here.

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