Sunday, October 7, 2012

Bullard, 4 Oct 2012

Sometimes you can just tell it's a smart guy who wrote the thing you're reading.

Jim Bullard is a smart guy, and he deserves respect for his abilities no matter what you think of his views.

Tim Duy reviews Bullard's 4 October PDF, presenting this graph:

Of this graph Bullard says (and Tim Duy quotes)

Distant inflation expectations from the TIPS market seem to suggest that investors do not completely trust the Fed to deliver on its 2 percent inflation target.

It's mild. Bullard uses the phrases "seem to suggest" and "investors do not completely trust". He is not predicting. He is observing.

Tim Duy is critical:

This is disingenuous on two levels. The first is that TIPS returns are based on CPI inflation, not the Fed's PCE inflation target. I find it hard to believe that Bullard does not understand the distinction.

"To understand why the TIPS breakeven rate will be above the Fed's PCE inflation target," Duy says, "simply note that CPI inflation tends to run above PCE inflation, on the average of about 44bp since 1990."

In other words, the one inflation rate runs about half a percent higher than the other, and Bullard showed the higher rate in his graph.

Gee whiz. I think what Bullard was showing is that inflation expectations are going up. Not that they are above some particular level.

But as Tim points out, the two inflation rates run together. So if the one he doesn't like is going up, the one he does like is probably going up as well. Which is what Bullard seems to be saying.

Anyway, inflation is inflation. Point, Bullard.

Duy writes:

The second reason this is disingenuous is the length of the time series. Bullard begins his chart at the beginning of this year, leaving the audience to believe that these high inflation expectations are a new phenomenon.

Duy looks at about ten years of data:

It looks like, since  the crisis, inflation expectations have been working their way back up to where they were before the crisis. Looks like Duy is onto something here.

But click the graph to see it bigger, and check out some of those labels in the right half of it. Expectations up with QE1. Expectations up with QE2. Expectations up with Operation Twist. And just at the end there, QE3: Expectations up, again? I expect Bullard thinks so.

I think that's reasonable. Point, Bullard.

Tim Duy seems to be among those who favors using higher inflation as a tool to erode debt and boost economic growth. Jim Bullard seems not to be.

I think inflation may be the least interesting topic in Bullard's presentation.

1 comment:

Jazzbumpa said...

I disagree. You can see how much if you read my comment at Duy's or on my blog.

On the 5 Yr expectations graph (red line) the tops post-crash are about at the level of the dips pre-crash. Which are historically low compared to actual inflation.

It seems very clear to me (and Duy) that Bullard used the short time line of your first graph to invite a misleading extrapolation. The second graph reveals the lie.

Bullard can not validly claim: "Distant inflation expectations from the TIPS market seem to suggest that investors do not completely trust the Fed to deliver on its 2 percent inflation target," unless and until the data line makes a clear break above a line projected across the post-crash peaks.

Further, you can't just shrug off the CPI to PCE difference. A half % is pretty significant near the 2% level.

I score both points to Duy, and resoundingly so.

I don't respect Bullard because he's smart. Nixon was smart. Lots of smart people deserve contempt. And the ones who lie to promote an agenda are very high on that list.

And why do people lie? Their agenda is not compatible with the truth.