Monday, May 18, 2015

Chicago Fed president Evans can spoke the market

Should the Fed wait or not to wait, that has and will be the question that is the key focus of bond markets. Chicago Fed president Evans gives his opinion, wait until 2106.

“it likely will not be appropriate to begin raising the fed funds rate until sometime in early 2016...Let’s be confident that we will achieve both dual mandate goals within a reasonable period of time before taking actions that could undermine the very progress we seek,”


Evans goes on to say, "It makes sense to favor some overshooting," above the 2% inflation target. So there you have it. Let's break Fed creditability as an inflation fighter and ask for some overshooting. His argument is that if we are under the inflation target we can handle some higher inflation, the cost is modest, and it can be controlled. 

Evans could be wrong on all three. There is no logic that low inflation has to be offset by higher inflation. The cost of inflation is always high if you don't get inflation adjusted wages or if you are a bondholder. We have history that the Fed has a hard time controlling inflation especially with its dual mandates. 

Comments like these are the catalysts that will send the bond markets lower. If you think that Mr Evans has any sway you should be worried.

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