How the Hell Can the Fed Find Neutral When It Doesn’t Know What Inflation Is?

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by Mish Shedlock, Mish Talk:

The Fed wants to set interest rates at a neutral spot defined as the rate that is neither expansionary nor contractionary. The Fed is certain to fail.

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Debate Over Neutral

Clueless About Inflation

Chicago Fed president Charlie Evans says that “at best 2.5% is neutral” but neutral isn’t good enough for him.

Evans wants a restrictive rate of 3.75% to 4.0%.Evans tosses around some core PCE numbers as well.

The Fed and nearly all economic analysts are clueless about inflation. The entire group looks at the CPI, PCE, and other distorted measures as “inflation”.

The results speak loudly. The Fed blew a DotCom bubble, a housing bubble, and an everything bubble each time hoping to make up for an alleged lack of inflation.

 Case Shiller Home Prices 

I have not updated the lead chart for two months but it shows the problem clearly.

All the economic jackasses are so focused on “consumer inflation” they totally ignore assets bubbles especially housing.

Asset bubbles in general are difficult to measure, but home prices are easy.

CS National Top 10 Metro CPI OER 2022-04A

The Fed and most economists ignore home prices calling them a capital good.

OK, so what? Is the goal to measure inflation or is it to measure “consumer inflation”?

In the prelude to the DotCom bubble, the fed ignored asset prices. It’s difficult to put an inflation number on speculation, but it has been rampant for over two decades.

Housing is different. It can easily be measured. But for two consecutive bubbles the Fed at best did not pay attention.

The Right Way to Neutral

Neutral isn’t meaningless, and yes it constantly moves. That’s why the Fed is constantly chasing its tail.

Nick Timiraos, chief economics correspondent, for the Wall Street Journal asked Evans “What’s the right way to estimate a nominal neutral rate in an environment of high inflation?”

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