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By New_Deal_democrat June 14, 2018 8:54 am
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So Much for Symmetry

Well, after all that talk about how the Fed had taken to heart that 2% inflation was a target and not a ceiling, and that there were symmetric risks on either side, now we know the truth: when it comes to actions, 2% core inflation is a ceiling.



A few years ago, when core inflation was running at the 1.6%-1.7% range, and there was briefly even overall DEflation, did the Fed panic and return to quantitative easing? Nope. It maintained the status quo.  When core inflation went slightly over 2% in 2016, it began to raise rates. Now that core inflation has risen to 2.2%, and overall inflation is at a 6 year high of 2.8%, it has indicated that it will quicken rate hikes from 3 to 4 this year:







Like the title says, so much for symmetry.



A few months ago, I premiered a quick and dirty leading indicator for jobs: the YoY% change in the fed funds rate tends to be the inverse of the YoY% change in payrolls over the next 12 to 24 months:







If the Fed is true to its word, the YoY% change in the Fed funds rate will rise from 0.75% to 1% in or about September. Since payrolls are currently growing at about 1.7% YoY, that implies a dramatic slowdown going into 2020.



The microscopically parsed yield curve also flattened a bit more, down to 0.4% between the 2 and 10 year bonds, the lowest during this expansion:







*IF* present trends continue, that would lead to an inversion by sometime early next year.



Meanwhile money supply, the other thing (at least as far as M1 is concerned) under the Fed's control, isn't doing too hot either. On a YoY% basis, real M2 is already in the danger zone, and real M1 isn't far from it:







In fact, together they are closer to flashing red than at any time in close to 10 years.



Growth in both has nearly stopped. In the 10 months since last July, real M1 is only up 0.9% (0.2% in the last 6 months), and real M2 is only up 0.4%:







If this trend continues, the only long leading financial indicator not flashing red by early next year will be credit supply by banks.

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