Two-Headed Snake

If you ever saw the movie “The Thing with Two Heads,” you may still be trying to forget it.  Starring Rosie Grier and Ray Milland, it covered the vicissitudes of life together when both their heads were functioning on one body.  Sorta reminds me of our Federal Reserve.

Allow me to explain.  The Federal Reserve (and all pundits who try to second guess the Fed’s moves) relies heavily on a report called Personal Consumption Expenditures (PCE), a fancy name for something considered a good measure of inflation.  On a monthly basis it tracks changes in the prices of consumer goods and services over time.  The initial report’s headline number provides us with a big picture view of inflation.  Looking deeper, the Federal Reserve produces a “core” PCE, one that removes the cost of food and energy.  It is the latter upon which they are seen to rely most heavily.  This, in turn, may lead one to ask an important question: “Are they nuts?”

Geopolitical developments and unpredictable weather events weigh heavily as factors in the monthly changes.  In other words, the Fed has absolutely no way to control the movements of either, movements that can often be quite volatile.  So is the best answer to this dilemma simply to ignore them?  Apparently.

And here is where the two-headed analogy comes in. Using the core measure may be quite sensible from an academic point of view and employing it consistently allows the marketplace to feel a bit secure when analyzing data and forming views of the economic future.  From an emotional point of view, the headline number has lately echoed the pain being felt by most Americans.  I was grocery shopping yesterday when I saw a cluster of carts gathering around the vegetable display.  A lady was holding a head of lettuce, complaining vociferously that its cost had climbed to $1.69!  Other comments followed quickly: “How are we going to live? I can’t afford to go out anymore! My travel reimbursement can’t cover the cost of gas! I’m afraid!”

These are comments neither the Fed nor the current administration want to hear.  Not that they are likely to.  The governors are paid just over $180,000 annually for their service; the Fed chair receives something north of $200,000.  Maybe they do their own shopping, maybe not, but I doubt they do so at Walmart where I was.  Perhaps they should. Surely they are privy to the frustration to which Americans are giving a loud voice.  While the governors cannot be fired, the administration can, and the latter certainly will put substantial pressure on the former.  Thus the Fed must think with two heads, both the technical and the more pragmatic.

Occasionally I see pictures of a rare mutant, a two-headed snake.  Keeping just one in focus can be dangerous, especially should the other be the one that bites you. (by J R Capps)