Federal Reserve and Monetary Policy: Inflation is Well Contained

Is long term inflation well contained? Two key data indicate that this is true (so far). Capacity Utilization is at 79.4% (the fed is usually worried when this number is around 85%) and there is still slack in the labor market. Notice, I did not say that there is inflation and inflationary expectations due to the labor market at full employment. In other words words, an unemployment rate at 5.2% is not the true measure of how close the US is toward full employment. One needs to read the details of the household survey.

See table A-12 of the Employment Situation Report. Subsection U-5: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for a job.

The current numbers are 6.4% not seasonal adjusted and 6.2% seasonal adjusted. Notice that I did not include the part timers who are working part time for economic reasons (9.4% NSA 9.1% SA subsection U-6). I did this because these can still increase inflation and inflationary expectations.

Some peoples' insistence that the household data shows that there is a phantom job market is misplaced. All one needs to do is to read the details of the Technical Paper 63RV: Current Population Survey - Design and Methodology, issued March 2002 (in PDF format). It only takes a wrong population projection to turn marginal data into useless data. Right off the bat, I can think of one error that is not corrected in the population projection. Having 3 million illegal aliens enter this country each year, according to Time, is enough to throw the population samples off.

It is my opinion that the fed is not concerned about long term inflation because the removal of the carry trade will do their job. Fed Funds Target at 3% can be perceived, by some, as the end of free US dollars. The first indication of the removal of the carry trade will be in the commodities market. Prices should fall as no new contracts are picked up because of the cost of the US dollar. The US dollar now has some cost associated with it. Expect an increase in the volatility in the commodities' pits. Also, expect this volatility to spread into the derivatives market.

Watch out for falling rocks. The financial markets are in for an earthquake type ride in the coming months. Well at least it should look like an earthquake if one looks at the graphs.