Study shows people like puppies more than monetary policy (9/11/15)

A drop in consumer sentiment and tame inflation data failed to make much impact on the markets, and stocks traded in a narrow range in advance of next week’s Federal Reserve meeting. 

The Dow gained 102 points, with 24 of its 30 of its components advancing; the S&P 500 Index added 8; and the Nasdaq was up 26. Advancers and decliners were even on both the NYSE and the Nasdaq. Treasury prices strengthened. Gold futures lost $6.00 to close at $1,103.30 an ounce. Crude oil dropped $1.29 to settle at $44.63 a barrel after Goldman Sachs, among other banks, cut their 2015 and 2016 price forecasts.

For the week, the Dow and the S&P 500 Index each climbed 2%, and the Nasdaq advanced nearly 3%.

In earnings news:

-       Kroger, the largest supermarket chain in the U.S., reported better-than-expected second quarter earnings of 44 cents a share, up from 35 cents a share a year ago. Revenue increased to $25.54 billion. Analysts forecast earnings of 39 cents a share on revenue of $25.5 billion. Same-store sales, excluding fuel, were up 5.3%. The company also increased its full-year earnings forecast to $1.92 to $1.98 per share from $1.90 to $1.95 per share. Kroger’s shares (KR) gained 5.1%. 

In other business news:

-       The U.S. producer price index was unchanged in August and fell 0.8% over the past 12 months, according to the Labor Department. The strong dollar and declining oil prices have kept prices down; however, this month, that was offset by an increase in profit margins for apparel, footwear, and accessories retailers. Core PPI, which excludes the volatile food and energy components, increased 0.3% in August and 0.9% in the last year. 

-       Consumer sentiment dropped in September according to the University of Michigan’s monthly survey. September’s reading was 85.7, down from 91.9 in August. The decline reflects increased concern over weakness in the global economy.

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Over the past few years, the Federal Open Market Committee has taken steps to increase transparency regarding monetary policy and better communicate its intentions to both Wall Street and Main Street. As next week's Fed meeting inches closer and the markets get more volatile, there are two questions on everyone’s minds: “Will they or won’t they raise rates?” and “What’s so transparent about the Fed?”

Well, not everyone is wondering that. In fact, even though you really can’t make it through a day without feeling the effects of interest rates and inflation, relatively few people really care about monetary policy. People are more interested in … wait for it … puppies. I know, shocking.

Yes. More people perform Google searches for puppies than they do for macroeconomic variables, such as GDP, unemployment rate, and inflation. 

This obvious little factoid came as a result of a study from the Brookings Institution looking into the effectiveness of inflation targets. Many economists believed that unanchored inflation expectations led to the runaway inflation rates of the ‘70s. To combat that, the Reserve Bank of New Zealand was the first central bank to set an inflation target in order to set those expectations, thereby keeping inflation in check. 

Twenty-five years after it was first implemented, a team of researchers surveyed New Zealand businesses and individuals to gauge awareness of the inflation target. As I’m sure you’ve already gathered, it wasn’t very high. 

When asked for their inflation forecast, only 20% of the firms in the study stated that inflation would be in line with the central bank’s target of 2%. Another 20% forecast an inflation rate of 5%, and yet another 20% thought it would be between 5% and 10%. Kind of all over the map. 

The researchers found that the people making these forecasts had limited knowledge about central bank policies and were more influenced by the increase in prices of milk or gas. Once managers at these firms were informed about the country’s monetary policy, they made significant adjustments to their inflation forecasts and business plans.

Really, it’s not the strategy that’s failing, because inflation for the most part is under control. But the researchers conclude it could be more effective with better communication. So, what could central banks do to get the average person’s attention? I looked up the top searches on Google for inspiration:

·      Announce policy changes at Apple’s iPhone event

·      Have Janet Yellen take a selfie with Kim Kardashian

·      And the most obvious, make sure there’s always puppies nearby 

Finally, on this Patriot’s Day, please take a moment to remember the fallen and honor them with a moment of silence or a gesture of kindness.