On Anchoring

It is not often that a national cable channel "comes to (us) live" from the Monetary Economics Workshop of the National Bureau of Economic Research (NBER) Summer Institute. That type of coverage only happens in instances such as today, when the chairman of the Fed speaks.

With such a light week of economic news, the street was hoping for even a morsel of market moving data from Bernanke's talk to the NBER. In a very academic speech to his very learned audience, he seemed to intentionally side-step any causative soundbites, giving little new news other than his view that consumers are more anchored than in previous years, although still imperfectly anchored.

He went on to explain "anchored" to mean relatively insensitive to incoming data, and expressed that being a good thing.

For the explanation of "well anchored", when the public experiences a period of inflation higher than they expect, but their long-term expectation of inflation changes little as a result, then inflation expectations are said by him to be "well anchored".

His example of the public reacting to a short period of higher-than-expected inflation by marking up their long-run expectation considerably, then expectations are "poorly anchored".

This is important because the Fed uses inflation expectations, economic slack and business anecdotes to forecast actual inflation. So, big swings in energy and food prices will have minimal impact on inflation forecasts as long as inflation expectations continue to be steady, even if imperfect.

Even though the text of his remarks didn't offer any market moving news, the long-run growth and stability tone did reinforce my beliefs that the FOMC will hold steady for at least the rest of this year.

Accordingly, I've chosen to fly the 'Yankee' nautical flag (above), indicating 'Dragging Anchor'.