Evan Soltas
Jun 14, 2012

So Much for Irrelevance

Today's economic news should put to rest any notion that monetary policy is irrelevant or otherwise ineffective in this environment, i.e. at the zero lower bound. It should exhaust the idea that central banks' stimulus "ammunition" has been exhausted; perhaps, even, the notion that such ammunition is exhaustible. It should slay the defeatism.

Reports of the death of monetary policy have been greatly exaggerated.

The Bank of England announced a pair of new liquidity programs, coordinating with the British government. A top finance minister in Japan said that his country may seek to devalue the yen. And analysts began to pencil in action from the Federal Reserve, and maybe even from the European Central Bank.

The result was swift. Stock markets in the United States rose sharply in the closing hours, up 1 percent. More importantly, the market's one-year inflation expectations lept up 14 percent, moving from 0.28 percent over the next year to 0.32 percent, marking a full week of stability after a total collapse of inflation expectations I have documented here and here on this blog.

Today's market reaction was in spite of pretty awful economic fundamental news, including a rise in weekly jobless claims.  Disinflation continues -- we saw both headline CPI deflation of 0.2 percent on the month, mainly due to fuel and food costs falling. Core CPI growth seems to have stabilized in the neighborhood of 2 percent year-over-year. By another measure, trim mean PCE, annualized inflation in April was 1.5 percent, down from 2.0 percent last month.

Tell me: if markets in the US have one hour to react to news of a possible monetary policy change, is this what that reaction should look like if monetary policy was irrelevant?

What it looks like, rather, is that markets are market monetarists.