Photo: By trackrecord on flickr
In his nightly note, BTIG’s Mike O’Rourke looks at the increasingly hawkish tone coming out of some Fed governors, which contrasts with Bernanke’s dovish attitude, and wonders if Fed leadership is ignoring what the market is saying with regard to inflation:By most domestic metrics, inflation remains tame (ex. CPI, PCE, TIP Spreads, University of Michigan Inflation Expectations). Even if one looks at the CRB index, which is weighted towards the economy (i.e. energy), it is only now recovering to 2006-2007 levels and remains nearly 30% below its 2008 peak. When you look at its cousin, the Continuous Commodity Index (the old equally weighted CRB), it tells a different story. The CCI is now 7% above 2008 peaks. Supply shocks and food inflation are a major topic of conversation among market participants. From our perspective that plays into inflation expectations. While the current data is not inflationary, the debate and commentary, which is so prevalent, can start shifting those expectations. Atlanta Fed President Dennis Lockhart, an FOMC non voter and dove, noted today that “inflation anxiety is rising.” Such a statement from a Fed President is clear anecdotal evidence that the stability of inflation expectations is being chipped away. While we don’t believe that inflation is a problem, we also know that we are just as likely to be wrong as the next person. Our point is that when the Fed totally ignores the market action, it runs the risk of a situation similar to “subprime is contained.” We certainly don’t believe markets are always right, but they should be respected and acknowledged. If the Fed solely waits for data that will be revised umpteen times to provide confirmation, then it will undoubtedly find itself late to the party in the same way QE2 commenced after the soft patch ended.
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