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ECB: Aligning Forward Guidance with New Inflation Target Framing

After the June CPI and PPI surge, the Federal Reserve does not appear to have changed its tune.  The price pressures are temporary, and the labor market is still "a ways off" from the "significant further progress" necessary to reduce the bond purchases. 

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After the June CPI and PPI surge, the Federal Reserve does not appear to have changed its tune.  The price pressures are temporary, and the labor market is still "a ways off" from the "significant further progress" necessary to reduce the bond purchases.  

Federal Reserve Chair Powell warned in his semi-annual testimony to Congress that inflation will likely remain elevated in the coming months before moderating.  Treasury Secretary Yellen shared a similar view separately. The case for the transitional nature of the price increases stems from the narrow breadth of price increases greater than 2% (around 1/3 of the CPI basket),, and most can be traced to the re-opening and base effect, like airfare, lodging, food away from home, and apparel.  Used vehicle prices again accounted for about a third of the monthly increase in CPI.  Part of this is related to the chip shortage impacting the availability of new cars. Part seems related to the economy re-opening and the lingering reluctance to return to mass transportation.  Surely, it is unreasonable to expect a year-old used car to sell for more than the new model on a sustained basis going forward. 

Of course, the Fed could be wrong, but economists collectively seem to agree.  Consider that the median Fed forecast sees the headline PCE deflator, which it targets at 3.4% this year and 2.1% next year.  The median in the Bloomberg survey puts the deflator at 3.1% this year and 2.3% next year.  More than that, several major central banks, including the European Central Bank, the Bank of England, and the Bank of Canada, have reached a similar assessment.  

The reason we are critical of the Fed's continued purchases of inflation-linked securities and Agency mortgage-backed securities is not due to some implication for the general price level. Instead, like the proverbial butcher with a finger on the scale, buying inflation-linked securities and then citing the break-evens as confirmation of its views, the Fed is not playing fair.  

News wires report that Treasury Secretary Yellen met with the Federal Reserve chief and other regulators last week to discuss a potential housing market bubble.  Buying MBS does not appear necessary to support a housing market that is being constrained by bottlenecks in residential construction (materials and labor), and where prices are rising at the fastest pace on record (nearly 14.6% year-over-year in May, according to S&P CoreLogic Case-Shiller US National Home Price Index).  One thing the Fed can do to reduce the risk of such a bubble is to stop feeding it by buying mortgage-backed securities.  In his congressional testimony, Powell denied a formal link between its MBS purchases and rising home prices, but the optics are poor in any event.  

The Fed will have another opportunity to change its stance at the July 28 FOMC meeting, but it is unlikely.  The formal and informal economic data available ahead of it are unlikely to have the gravitas to sway opinion.  The focus turns to the ECB meeting.  Expectations for the July 22 meeting were running low.  The central bank has already indicated that it would continue to buy bonds under the Pandemic Emergency Purchase Program at an elevated pace until at least the September meeting, when new forecasts will be available.  However, the seemingly inexplicable acceleration of its strategic review and its new inflation framework requires some adjustment in the ECB's forward guidance.  

At the most basic level, the ECB jettisoned the tortured framing of inflation it had adopted in 2003 that the goal was "close to but below 2%". Instead, it adopted a 2% symmetrical target, which means deviations in either direction are not desired.  Yet, the ECB was explicit that it is prepared to accept a temporary overshoot due to the persistently forceful monetary policy trying to achieve its target.  

Moreover, it was a unanimous decision.  Nonetheless, many observers insist that the ECB has abandoned its Bundesbank DNA.  With BBK President Weidmann explicitly endorsing the symmetrical bias, one has to wonder about the understanding of the central bank's DNA.  The real meaning of the policy lies in its implementation, and therein lies the challenge of this ECB meeting.  It is too early to argue that the ECB's credibility is on the line as it seems popular with the commentariat.  It is one of those claims that cannot be refuted because it cannot be isolated and measured.  A president firing central bankers for not easing policy undermines credibility in a palpable sense, but how can we test the hypothesis about the ECB's credibility?   

The fact of the matter is that the ECB has not raised interest rates since 2011.  And even then, the two hikes were likely a mistake, and in any event, were unwound quickly as Draghi, who previously had been referred to as the Prussian Roman, took the helm from Trichet.  The ECB, like other major central banks, continuously saw inflation undershoot its target. 

Leaving aside the rhetoric, the eurozone's CPI has averaged 1.6% over the past 20-years (monthly data), 1.2% over the past 10-years, and 1.1% over the past five years.   US CPI has run a bit hotter, averaging 2.1% over the past two decades and 1.8% over the past ten years.  Headline CPI has averaged 2.0% over the past five years.  The US PCE deflator that is now targetted at an average (unspecified period) of 2% has, in fact, averaged 1.8% over the past 20 years and 1.5% for the past decade.  The recent acceleration has helped lift the five-year average (60 months) to 1.7%.  

Isn't this the confidence game?  After years of missing its point target, the Federal Reserve says that the 2% is still valid, but it is an average, meaning it will purposely seek above-target inflation to offset the persistent undershoot. Likewise, the ECB says it will now embrace the 2% target, which it has habitually missed, as a symmetrical target and could tolerate a temporary overshoot.   

With the new target, the ECB is going to adjust its forward guidance. However, while the new target may help prevent early tightening, it is not clear that the ECB is ready to introduce a new instrument, such as yield curve control, to its arsenal.  In addition to interest rates, a traditional tool, it has also developed two others through the recent crises: purchasing bonds and paying banks to lend, as in the Targeted Long-Term Refinancing Operations (TLTROs).  

The new inflation framing can allow the ECB to shift from "convergence" to the inflation target to meet or slightly surpass the 2% target before raising interest rates.  Is this significant?  Probably not.  The market has already taken that view.  The Overnight Index Swaps show a rate hike has not been discounted at all for at least the next three years, which is the extent of the ECB's staff forecasts.  

The pace of ECB bond purchases has not dictated the direction of the euro or eurozone interest rates.  The issue is not the current pace as it deploys the 1.85 trillion euro "envelope" of the Pandemic Emergency Purchases Program.  The variation does not appear significant with other perturbations,  the maturing issues, the issuance calendar, and seasonal adjustments.  If the staff forecasts help drive the pace of the purchases rather than simply provide cover for what officials desire to do in the first place, then little has taken place in the past month that would suggest an important shift in forecasts.  The euro is slightly weaker, oil prices are little changed net-net, and the survey data suggest that the regional economy is accelerating, even if unevenly, along the lines it anticipated.

Still, the new formulation of the inflation target gives the doves a new tool to push their advantage.  The PEPP is flexible (e.g., issuer limit of 33%), and the hawks argue that the economic emergency is winding down.  Yet, the ECB was buying bonds and making long-term loans before the pandemic struck.  It is those policy levers that the ECB will likely use after next March when the PEPP concludes, but that fight is not next week's. 

A challenge is that the non-emergency facility, the Public Sector Purchases Program, is running against its self-imposed limits.  It may be tempting to give the program the flexibility of the PEPP, but the rub is that Germany's Constitutional Court ruled that the issuer limit keeps the program inside the ECB's mandate in which it is prohibited from monetary financing of governments' deficits.  Leaving aside the German court's standing to overrule a European Court of Justice, it may be preferable to launch a new but similar facility after PEPP's envelop expires. Thus, the ECB's balance sheet looks to be a semi-permanent use policy tool.

Three additional initiatives by the ECB will also likely be the subject of discussion. First, the ECB will include climate change considerations in its asset purchases and broader policy decisions.  What does this really mean when the "green" still is ill-defined (to say the least, perhaps like organic was for decades after it was first introduced to consumers in the 1940s). Perhaps, it will find the Bank of Japan's approach to lending to banks to lend to projects they judge as green, as in a green TLTRO. 

Secondly, Lagarde indicated that owner-occupied housing costs will be included in the harmonized inflation measure.  This would seem to potentially add slightly to the HICP measure.  That said, in the UK, which adopted a CPI measure that includes owner-occupied costs as its preferred measure in 2017, the new measure has dipped below the  EU harmonized measure (2.4% vs. 2.5%) for the first time since last March.  Until now, the logic had been that homeownership was an investment, not a consumption decision. What changed? 

The third initiative is the formal launch of the investigation phase of a digital euro. This period may take around two years.  The digital euro is meant to complement, not replace, current payment systems.  Discussions over design, distribution, the role of wholesale and retail, privacy will be hashed out.  An eco-system around a digital euro also needs to be thought through. After the investigation and design, the implementation preparations are projected to take around three years. This means that a digital euro could be launched in 2026-2027. 

Yet, it seems that many EMU members have already digitized, not using cash, and buying things internet. Europe also has an internal payments system, SEPA, like the ACH (Automated Clearing House) in the US, that quickly and efficiently settles credit and debit transactions in large batches.  The UK's version is called BACS.  For international transactions, SWIFT is used.  Can they be made more efficient?  Probably.  That is a work that is always in progress, but it is not clear what a digital euro will give Europe that it does not already have.  

While the same could be said for many high-income countries, it obviously does not hold in some emerging market countries. For example, it is clear what China secures, command, and control functions from the introduction of a digital yuan.  Like supporting green efforts without defining them, the ECB could be putting the cart before the horse with the digital effort by sidestepping the question of the goal, problem, or challenge that will be met with a digital currency.  This is not an argument against one, but it seems more like an evolution of existing practices than the revolution some suggest.   



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Survey Shows Declining Concerns Among Americans About COVID-19

Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat"…

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Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat" to the health of the US population - a sharp decline from a high of 67% in July 2020.

(SARMDY/Shutterstock)

What's more, the Pew Research Center survey conducted from Feb. 7 to Feb. 11 showed that just 10% of Americans are concerned that they will  catch the disease and require hospitalization.

"This data represents a low ebb of public concern about the virus that reached its height in the summer and fall of 2020, when as many as two-thirds of Americans viewed COVID-19 as a major threat to public health," reads the report, which was published March 7.

According to the survey, half of the participants understand the significance of researchers and healthcare providers in understanding and treating long COVID - however 27% of participants consider this issue less important, while 22% of Americans are unaware of long COVID.

What's more, while Democrats were far more worried than Republicans in the past, that gap has narrowed significantly.

"In the pandemic’s first year, Democrats were routinely about 40 points more likely than Republicans to view the coronavirus as a major threat to the health of the U.S. population. This gap has waned as overall levels of concern have fallen," reads the report.

More via the Epoch Times;

The survey found that three in ten Democrats under 50 have received an updated COVID-19 vaccine, compared with 66 percent of Democrats ages 65 and older.

Moreover, 66 percent of Democrats ages 65 and older have received the updated COVID-19 vaccine, while only 24 percent of Republicans ages 65 and older have done so.

“This 42-point partisan gap is much wider now than at other points since the start of the outbreak. For instance, in August 2021, 93 percent of older Democrats and 78 percent of older Republicans said they had received all the shots needed to be fully vaccinated (a 15-point gap),” it noted.

COVID-19 No Longer an Emergency

The U.S. Centers for Disease Control and Prevention (CDC) recently issued its updated recommendations for the virus, which no longer require people to stay home for five days after testing positive for COVID-19.

The updated guidance recommends that people who contracted a respiratory virus stay home, and they can resume normal activities when their symptoms improve overall and their fever subsides for 24 hours without medication.

“We still must use the commonsense solutions we know work to protect ourselves and others from serious illness from respiratory viruses, this includes vaccination, treatment, and staying home when we get sick,” CDC director Dr. Mandy Cohen said in a statement.

The CDC said that while the virus remains a threat, it is now less likely to cause severe illness because of widespread immunity and improved tools to prevent and treat the disease.

Importantly, states and countries that have already adjusted recommended isolation times have not seen increased hospitalizations or deaths related to COVID-19,” it stated.

The federal government suspended its free at-home COVID-19 test program on March 8, according to a website set up by the government, following a decrease in COVID-19-related hospitalizations.

According to the CDC, hospitalization rates for COVID-19 and influenza diseases remain “elevated” but are decreasing in some parts of the United States.

Tyler Durden Sun, 03/10/2024 - 22:45

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International

Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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Government

The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While “Waiting” For Deporation, Asylum

The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several…

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several months we've pointed out that there has  been zero job creation for native-born workers since the summer of 2018...

... and that since Joe Biden was sworn into office, most of the post-pandemic job gains the administration continuously brags about have gone foreign-born (read immigrants, mostly illegal ones) workers.

And while the left might find this data almost as verboten as FBI crime statistics - as it directly supports the so-called "great replacement theory" we're not supposed to discuss - it also coincides with record numbers of illegal crossings into the United States under Biden.

In short, the Biden administration opened the floodgates, 10 million illegal immigrants poured into the country, and most of the post-pandemic "jobs recovery" went to foreign-born workers, of which illegal immigrants represent the largest chunk.

Asylum seekers from Venezuela await work permits on June 28, 2023 (via the Chicago Tribune)

'But Tyler, illegal immigrants can't possibly work in the United States whilst awaiting their asylum hearings,' one might hear from the peanut gallery. On the contrary: ever since Biden reversed a key aspect of Trump's labor policies, all illegal immigrants - even those awaiting deportation proceedings - have been given carte blanche to work while awaiting said proceedings for up to five years...

... something which even Elon Musk was shocked to learn.

Which leads us to another question: recall that the primary concern for the Biden admin for much of 2022 and 2023 was soaring prices, i.e., relentless inflation in general, and rising wages in particular, which in turn prompted even Goldman to admit two years ago that the diabolical wage-price spiral had been unleashed in the US (diabolical, because nothing absent a major economic shock, read recession or depression, can short-circuit it once it is in place).

Well, there is one other thing that can break the wage-price spiral loop: a flood of ultra-cheap illegal immigrant workers. But don't take our word for it: here is Fed Chair Jerome Powell himself during his February 60 Minutes interview:

PELLEY: Why was immigration important?

POWELL: Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrants. Immigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans do. But that's largely because of the age difference. They tend to skew younger.

PELLEY: Why is immigration so important to the economy?

POWELL: Well, first of all, immigration policy is not the Fed's job. The immigration policy of the United States is really important and really much under discussion right now, and that's none of our business. We don't set immigration policy. We don't comment on it.

I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.

PELLEY: The country needed the workers.

POWELL: It did. And so, that's what's been happening.

Translation: Immigrants work hard, and Americans are lazy. But much more importantly, since illegal immigrants will work for any pay, and since Biden's Department of Homeland Security, via its Citizenship and Immigration Services Agency, has made it so illegal immigrants can work in the US perfectly legally for up to 5 years (if not more), one can argue that the flood of illegals through the southern border has been the primary reason why inflation - or rather mostly wage inflation, that all too critical component of the wage-price spiral  - has moderated in in the past year, when the US labor market suddenly found itself flooded with millions of perfectly eligible workers, who just also happen to be illegal immigrants and thus have zero wage bargaining options.

None of this is to suggest that the relentless flood of immigrants into the US is not also driven by voting and census concerns - something Elon Musk has been pounding the table on in recent weeks, and has gone so far to call it "the biggest corruption of American democracy in the 21st century", but in retrospect, one can also argue that the only modest success the Biden admin has had in the past year - namely bringing inflation down from a torrid 9% annual rate to "only" 3% - has also been due to the millions of illegals he's imported into the country.

We would be remiss if we didn't also note that this so often carries catastrophic short-term consequences for the social fabric of the country (the Laken Riley fiasco being only the latest example), not to mention the far more dire long-term consequences for the future of the US - chief among them the trillions of dollars in debt the US will need to incur to pay for all those new illegal immigrants Democrat voters and low-paid workers. This is on top of the labor revolution that will kick in once AI leads to mass layoffs among high-paying, white-collar jobs, after which all those newly laid off native-born workers hoping to trade down to lower paying (if available) jobs will discover that hardened criminals from Honduras or Guatemala have already taken them, all thanks to Joe Biden.

Tyler Durden Sun, 03/10/2024 - 19:15

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