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More Evidence of Economic Weakness and Absence of Inflation

by Peter A. Grant

May 16, AM
(from USAGOLD.com) --

Gold remains defensive below $1400, having dropped to four-week lows in overseas trading. However, the latest round of U.S. data reinforces the theme of yesterday's DMR; that the economy really isn't in a true recovery.

Initial jobless claims jumped 32k last week, housing starts plunged 16.5% in April and the Philly Fed index tumbled to -5.2 in May. This lends credence to my assertion yesterday that "the broader data simply don't bear out the notion that the economy is finally reaching escape velocity."

On top of that, CPI fell 0.4% in April, below expectations of -0.1%, adding to evidence that deflationary pressures are mounting. Signs of slowing growth aside, the utter absence of inflation is reason enough for the Fed to keep its foot on the monetary gas pedal. Certainly there doesn't seem to be any reason for the Fed to seriously consider tapering accommodations at this point.

In fact, there seems to be reason for them to be contemplating additional measures in light of heightened growth risks and diminishing inflation expectations. This is something that they made quite clear they were prepared to do in the last FOMC statement, should economic conditions warrant.

Despite the fact that the Fed has pumped trillions of dollars into the economy in recent years with the expressed goal of creating 2%+ inflation and reinvigorating the economy, the exact opposite now seems to be occurring. So what's our central bank to do?

The Fed has been on hold since announcing QE4 back in December, while the rest of their major counterparts have had a very distinct easing bias. The one exception is the BoE, but that's likely only because they're undergoing a leadership change. Once new BoE governor Carney is in place, it is widely expected that they will increase asset purchases.

I suppose the Fed could begin removing accommodations premised on the reality that they simply aren't working. There would likely be dire consequence of such a move.

More likely, based on historic precedence, is that the Fed will continue throwing good money after bad. That's the path Japan has chosen, at we certainly seem to be following in their footsteps.

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More Evidence of Economic Weakness and Absence of Inflation