VOLUNTARY OR INVOLUNTARY?

Minneapolis Federal Reserve Bank President Narayana Kocherlakota on the eve of Halloween unleashed a mouthful most likely without realizing it.

The only one of 10 Fed officials to vote against ending QE, Kocherlakota said, talking about inflation: "We just cannot take the credibility of our targets for granted."

If you think that through it's a pretty scary thought. Excuse us but isn't that what the Fed with their so-called  transparency and choice of language, has been trying to get us to do, not only get but better understand their message.

It's called forward guidance. The real truth is the entire Fed has been based on taking the "credibility" of their targets for granted as in trust us we know what the hell we're doing.

Kocherlakota in calling for what is essentially more, longer QE, makes an interesting point. But let's assume he's correct and we can't take these targets for granted. What if the inflation target of two percent is low? In other words, as some believe, the Fed eventually loses control of inflation and it exceeds the two percent target?

It's an hypothesis of course. But with all the deflation worries and hand-wringing, it's an hypothesis with the least evidence to support it. And that's just one of the reasons we like it. The deflationary sky is descending all around us. How could the Fed lose control?

In mid-October Barron's interviewed the three money managers who replaced Bill Gross at Pimco. To be fair, they didn't just replace Gross; they were already there managing funds and they didn't just suddenly fall in to the bond trading world. Not an endorsement, just a fact.

Here's a couple of interesting quotes from that interview. Make of them what you will. The salient point, at least for us, is this was before the BOJ thrust it foot full force on the monetary gas pedal.

 We use TIPS as an insurance policy, or a tail-risk hedge. Given the large monetary policy experiment that the Fed is undertaking, there’s a risk that the Fed loses control of inflation.

 We own TIPS in place of normal Treasuries. The portfolio is supposed to own a certain amount of 30-year Treasuries, and we own more of that in 30-year TIPS. About 7%-8% of the fund is in longer-term TIPS [10 years or more in maturity]. We don’t think inflation is an imminent threat, but as soon as we begin to get more tightness in the labor market and more wage inflation, then inflation expectations begin to run [higher] in advance of that. We think the Fed may eventually let the inflation rate go over its target.

Is the term "let" as used here voluntary or involuntary?