Posts Tagged ‘Monetary Policy’
Friday, October 28, 2011pm
What do you get when the producer of the world’s reserve currency takes on too much debt? Nothing less than the end of the US Treasury-based monetary system.
So says Eric Janszen, economic and financial market analyst and proprietor of iTulip.com. In chronicling the decline of the global economy over the past decade, Eric has formulated a framework called the “Ka-POOM” theory, which endeavors to understand how the immense run-up in global debt will be resolved.
In short, it looks at the credit bubble that began in the early 1980′s, started accelerating in 1995, and has now reached epic proportions. The amounts are so staggering at this stage that Eric believes it is too politically undesirable to let natural market adjustments clear them away — the magnitude of the deflationary pain this would create is simply unacceptable for politicians looking to get re-elected. The only other available option is to service these debts via a dramatically devalued currency. Hence the key role the Fed is playing today.
The Fed is at the epicenter of this process, intervening heavily to keep the natural corrective market forces at bay. In this, it has a dual strategy. The first is to keep asset prices high (i.e., fight asset deflation), which it is doing by keeping interest rates historically low. The second is to keep wage and commodity costs under control, which it primarily does via devaluing the currency (maintaining a “weak dollar”).
And, of course, through its intervention, the Fed is doing all it can to keep the current financial system in place to perpetuate the process for as long as possible. The end result is a fundamental shift in risk from Wall Street to the taxpayer.
So the big question is: How long can this last? Is there a point at which confidence in the system breaks and market forces finally overwhelm the intervention?
Eric’s answers: “Much longer than most people expect.” And “Yes.”
First off, as the most important central bank in the world, the Fed has supernormal powers. In theory, it can expand its balance sheet infinitely. Its ability to absorb massive amounts of new liabilities is theoretically limitless, much of which can be easily concealed from an accounting standpoint.
And since the US is both the world’s largest economy, as well as the provider of its reserve currency, other countries are compelled to support the current regime. A mortal crack-up in the US economy would deliver undue pain to all its trading partners, so they continue to buy Treasuries in sufficient amount to fund US economic activity.
But that’s not to say they’re happy about it. And here’s where attention should be paid (and where the importance of gold comes in).
For much of the past century, the United States comprised approximately 54-58% of the global economy. Today, its share has shrunk down to about 18%, meaning its relative importance to the global system has diminished.
Issuing the world’s reserve currency is a privilege that must be continually earned through transparency and sound stewardship — qualities the US has flagrantly lacked in the past several decades as it has been blowing asset bubbles and running trillion-dollar deficits, via incurring massive debts and increasing its money supply tremendously. So, even as they continue to support the current Treasury-backed monetary regime, the world’s central banks have begun hedging their exposure.
After several decades of being net sellers, the world’s central banks became net buyers of gold in the second quarter of 2009. As Eric puts it:
There was no Plan B in the global monetary system when it switched over to the US dollar reserve basis for global monetary reserves. The only fallback is gold, gold is the only reserve asset that central banks hold other than dollars, and to some extent euros, but it is mostly gold. So gold is the fallback. So what I thought was going to happen is that over time, gradually, that there would be an increase at some point in gold holdings by central banks as they hedged the marginal increase and the number of Treasury bonds that they needed to hold as a result of conducting trade with the US and also simply maintaining the US economy through low interest rates and providing sufficient investment to continue to offer the US government.
So what is very interesting to me is [that] starting in the second quarter of 2009, right after the financial crisis, is when global central banks became net buyers of gold, which to me indicated that they had as a group, determined that it was time to more seriously hedge their dollar assets, even as they continue to buy Treasury bonds to increase their hedging.
Before that, there were effectively two teams: There were the buyers, who were countries like India and Russia and China, and the sellers, which are most of your European countries. And that structure of the gold market occurred and was maintained until the second quarter of 2009, and it shifted to a much broader base increase in the number of governments participating in the gold market, including Saudi Arabia, Mexico, and other allies of the United States.
Eric sees this move by central banks, of positioning themselves closer to the door, as a natural step to the inevitable endgame here, which is the dissolution of the US Treasury dollar-based monetary system. Due to entrenched special interests, politics, escalating commodity scarcity, and other factors, he does not see the US taking necessary corrective action before confidence in the solvency of the US and its currency collapses.
As such, Eric advises investors position themselves into gold and assets that take advantage of rising rents and energy prices.
To Read the FULL TRANSCRIPT CLICK HERE.
Read the entire article HERE.
By Greg Robb
August 25, 2011
Bernanke will open the Fed conference with a speech on Friday morning at 10 a.m. Eastern. Stocks have moved higher this week after being pummeled in mid-August, and many analysts attribute the move to investor hopes that Bernanke will use his speech to promise another round of asset purchases, or QE3.
Economists said that the recent weakness in the economy stems from structural issues like foreclosed properties and an unskilled pool of unemployed labor that are immune from monetary policy stimulus.
“I hope he talks about the limitations of monetary policy,” said Mickey Levy, chief economist at Bank of America.
Fed policy is very effective at preventing a downturn but once weak demand is in place, monetary policy cannot lift it, Levy said.
“All the targeted counter-cyclical stimulus is not going to address the huge pocket of distressed properties,” Levy said.
John Silvia, chief economist at Wells Fargo, agreed that the woes facing the economy are structural in nature and described the Fed policy options as modest.
“The Fed has shot the big cannons. They are now playing the game with smaller ammunition,” Silvia said.
At its interest rate meeting earlier this month, the central bank surprised the markets by promising to keep its benchmark Federal funds rate near zero until mid-2013.
Former Fed governor Randall Krozner said that is all the Fed is prepared to do at the moment, and speculation of an announcement of QE3 in markets was misplaced.
Such a big policy shift would only come at a formal Federal Open Market Committee meeting and not in a speech, he said.
Many Fed watchers, including former vice chairman Alan Blinder, believe the central bank is likely to engineer another round of asset purchases, or quantitative easing. Bernanke ready for action but when is in doubt.
In the first round of bond purchases between Dec. 2008 and March 2010, the Fed bought $1.7 trillion of mostly mortgage securities, and in the second round between November and June, the central bank snapped up $600 billion of Treasury bonds.
These purchases did not stimulate demand, Levy noted.
“The slowdown is not the fault of not enough liquidity,” he said.
Levy said he expected Bernanke to say the Fed will do whatever it has to do to avoid recession.
Ultimately, the next step is likely to be take steps to alter the composition of the composition of the Fed’s balance sheet to keep bond yields low, he said.
“That is all the Fed can do,” Levy said.
“More QE would not help. Lower long-term yields on the margin would help,” he added.
Silvia forecast sluggish growth in the 2% range over the next 18 months.
“We are in one of those periods where the economy grows far below potential and the unemployment rate will probably rise,” he said.
“It is a very challenging economy. I just don’t see a silver bullet or a special spark,” he said.
Read the entire article HERE.
By Greg Robb
June 20, 2011, 10:19 a.m. EDT
The Federal Open Market Committee, which on Tuesday starts a two-day meeting, is widely expected to make the formal decision to end the current program of buying $600 billion of Treasury securities on June 30. It is also expected to maintain its existing policy to reinvest principal payments from maturing securities to not let its balance sheet shrink, and to keep the target range for the federal funds rate at between 0% and 0.25%.
That decision, due at 12:30 p.m., should hold few surprises, though the accompanying statement will be eyed. But the fireworks will start at 2:15 p.m., when Bernanke holds his second post-rate-decision press conference.
Bernanke’s challenge this week will be to calm financial markets, Corporate America and Main Street, all jittery about what’s in store for the U.S. economy.
A recent soft patch of economic data has only added to existing concerns about the fate of the U.S. once the Fed’s Treasury bond purchase program, frequently called QE2, comes to an end.
A stock market that has slumped for six weeks out of seven, a sky-high unemployment rate of 9.1% and the biggest 12-month inflation rise since Oct. 2008 has provided ammunition of all sorts for the Fed’s many critics.
“What Bernanke needs to do is build confidence in the economy. He has got to be able to step up there and say things are going to get better,” said Robert Brusca, chief economist at FAO Economics.
Bernard Baumohl, managing director of The Economic Outlook Group, said that Bernanke will need solid arguments to convince investors.
“I don’t think he is going to be a cheerleader. I think he’s going to have to be practical and realistic,” Baumohl said.
“He’s got to be straight,” agreed Scott Anderson, senior economist at Wells Fargo.
Baumohl said Bernanke will try to soothe markets by saying there is not going to be any fundamental change to policy in either direction for the foreseeable future.
While the hurdles to a third round of bond purchases are high, the same is true for an exit from the current ultra-low policy stance, Baumohl said.
“He will convey the message that the Fed is going to take a wait-and-see approach, Baumohl said.
But Bernanke will stress that the end of the QE2 program is not the equivalent of pulling the plug on the economy, said Michael Moran, chief economist at Daiwa Securities in New York.
In another step to build confidence, Bernanke will pledge to very closely monitor conditions to see if any of the threats facing the U.S. economy materialize such as a financial crisis in Europe, Baumohl said.
On inflation, Bernanke is likely to be a bit more hawkish than previous meetings, said Maury Harris, chief economist at UBS Securities, in a comment echoed by a number of analysts.
Core consumer price inflation, excluding food and energy prices, rose 0.3% in May, the biggest gain since June 2008. Many see core inflation rising near 2% year-over-year by the end of the year.
“Bernanke will have to acknowledge that,” Harris said.
Mike Englund. chief economist at Action Economics, said the public is so upset about higher energy prices that Bernanke is not likely to “pop the cork” about the recent small drop in gas prices.
“It is hard to be optimistic about $98 per barrel price of oil,” he said.
Ray Stone, economist at the forecasting firm Stone & McCarthy Research Associates, said he was intrigued by some news reports that the Fed might adopt a formal inflation target. Atlanta Fed President Dennis Lockhart this month backed an inflation target, and Bloomberg News reported that Fed officials were seriously discussing it. The Wall Street Journal said action isn’t likely at this meeting.
At the moment, the Fed has an implicit target of roughly 2% inflation.
But with inflation moving higher while Fed policy is accommodative, an inflation target might be one way for the Fed to stress it remains vigilant, said economists at Barclays Capital Research.
Stone said the odds are “less than 50-50” that the Fed would adopt a formal target “but I wouldn’t be knocked out of my chair if they did it,” he said.
The Fed also is expected to cut its economic growth forecast, which currently calls for growth between 3.1% and 3.3% this year.
Read the entire article HERE.
Wednesday, 1 Jun 2011 | 6:42 AM ET
By Jessica Hartogs
Investors should prepare themselves for a third round of quantitative easing, Simon Maughn, co-head of European equities at MF Global, told CNBC Wednesday.
“The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming,” said Maughn. “The bond markets are all smarter than us, and that’s exactly what the bond markets are telling me.”
“What’s interesting in the bond markets over the last couple of sessions is, you’ve seen human traders trying to step in and call this turn in the market the same way that equities have done … and they have just been mowed down by the quant funds which are all about leverage, all about momentum and are betting on bond prices going up,” added Maughn.
Once again, the United States will step up as the marginal buyer of bonds, said Maughn.
“One more big injection of cash into the bond market should take you through at least the summer season into the beginning of the fourth quarter.”
“That cash injection will have the normal inflationary knock-on impact, driving back up commodities, supporting industrial stocks, dragging the financials up with them… I think it’s all about the monetary injection trade,” Maughn told CNBC.
Read the entire article HERE.
May 1, 2011
While it will not surprise anyone that Japan, which for the past 3 decades has been a monetary policy basket case caught in what bankers like calling a deflationary spiral (yet which others like Sean Corrigan merely define as prices re-indexing to a fair value absent endless cheap credit crutches), has constantly had to resort to a record loose monetary policy coupled with endless episodes of quantitative easing, some may not know that over the past month Japan has seen its current account balance swell by $250 billion, or nearly half the entire Fed QE2 monetization mandate. And as the BOJ continues to disclose the full extent of the Japanese economic devastation following March 11, we are confident that very soon the most recent episode of Japanese “printing” will surpass the $600 billion that the Fed is injecting into the US economy (in addition to the roughly $250 billion in Treasury bonds monetized by the BOJ each year): an amount roughly 5 times greater than America’s when expressed as a ratio of GDP. It is thus no surprise then that Bernanke does not seem too concerned with the purported end of QE – after all money printing is merely moving from developed world point A to developed world point B. And thanks to monetary linkages of “globalization” all this brand new money will once again find its way into speculative assets, and thus, Fed mandate #3 favorite – Russell 2000. Below we provide a closer look at what exactly the current and future, Japanese QEasing will look like.
To do that, we present some observations from an Ad Hoc Comment by GaveKal: “The Understandable Japanese Liquidity Surge.” As we presented yesterday, while for the time being the Japanese monetary base (unlike our own exploding Adjusted Monetary Base) will not show much if any change for a few months, the Japanese current account balance has “swollen by Yen equivalent of $250 billion in the past few days (i.e., about half of the amount of QE).” This is shown on the chart below:
And since this move does not occur in isolation, it has impacted the broader total assets category of the BOJ, which is now close to an all time high following the recent surge:
So while it is now obvious that Japan has quietly, and without much fanfare moved into another monetization regime, the two questions remaining are: i) what is the mechanism by which Japan is pumping a quarter trillion into the market, and ii) and, much more important, where is this money going? GaveKal answers question #1:
Breaking down the BoJ’s increase in assets, it seems that the entire increase of the past week is pretty much attributable to one source – loans by funds supplying operations against pooled collateral (green line below). This is clearly a change in normal practices:
Click Chart for larger view
- In 2002-2004, the BoJ injected cash in the system by purchasing treasury bills (dark blue above).
- In 2008, the little the BoJ did was through the purchase of foreign assets and even then, the BoJ’s intervention was sterilized through the sale of JGBs (yellow line going down).
So what is this ‘loans by funds against pooled collateral’? Given the underlying amount, the only explanation we come up with (though we look forward to alternative theories from clients) is that the BoJ has dramatically increased its bank repo operation; in essence, making sure that the banks are not scarce of cash in the middle of the current national emergency. Importantly, so far, there seems to be no sterilization by the BoJ of this cash injection. A fact which begs a number of important questions, including:
- Why isn’t the Yen retreating on this news? Is it just a question of delays and the markets still finding their footing after the massive exogenous shock of two weeks ago?
- Where will that excess money go? Will it all go into rebuilding the devastated areas? Will it go into local stocks? Or will we see what we saw in 2003 onwards from Japanese investors, namely a rush for carry?
On this last point, it is interesting to note that since the G7 intervention was announced on the 18th, the typical ‘carry’ currencies, namely AUD, NZD, ZAR, BRL, etc., have done rather well:
Click Chart for larger view
As for question #2, as Louis Gave speculates, the excess money, instead of hitting the Nikkei, and with the dramatic relative underperformance of the Japanese stock market compared to the US this would not be surprising at all, could simply be fuelling the latest surge in commodity prices, which at this point provide far greater rates of return than stocks (by now everyone has seen the parabolic rise in silver prices in 2011 soon to be followed by gold and all other commodities). To wit:
Another possibility of course is that this excess liquidity is already helping fuel the next leg of the equity bull market while a more worrying development would be if this excess cash found its way in the hot ‘momentum’ trades of the day, namely oil, gold or silver.
Thus if the March action by the BOJ has taken about one month to translate into a nearly $20 spike in silver, just what will happen as the BOJ is forced to pump hundreds of billions more into its market? And pump it will: after holding back for over a month on the consequences of Japan’s earthquake, tsunami and nuclear disaster, the head of the central bank has finally stepped up to the plate and warned that the Japanese economic outlook is “very severe.”
First a quick overview of what was disclosed about the Japanese economy in the past week: factory output fell at a record monthly pace in March, household spending declined at a record annual rate and another private survey showed manufacturing activity languishing at a two-year low. This is about as catastrhopic for a deflationary economy as it gets. And with apologies to Larry Kudlow, there is no boost in GDP coming any time soon. In fact, March monthly GDP was cut to the lowest since Lehman.
So with its back to the wall, what is Japan to do? More of the same of course. From Reuters:
Bank of Japan Governor Masaaki Shirakawa said on Saturday that the country’s economic outlook was very severe and that the central bank would take appropriate action to support the economy.
But he offered few clues on whether and when the BOJ would expand its asset-buying scheme, only saying that its next policy step would depend on economic conditions at the time.
“The BOJ sees the outlook for Japan’s economy as very severe,” Shirakawa told a financial committee meeting in the lower house of parliament.
“We’d like to take appropriate policy steps as needed while monitoring the economy and prices, taking into account that uncertainty over the outlook is high,” he said.
Asked by a lawmaker whether the BOJ would consider buying more government bonds to support the economy, Shirakawa said only: “We’d like to consider in earnest what would be the desirable step to take.”
The BOJ kept monetary policy unchanged on Thursday even as it lowered its growth forecast for the current fiscal year, which began in April, and warned of uncertainties over the extent of damage that last month’s devastating earthquake would inflict on the economy.
Shirakawa reiterated that having just expanded its asset purchasing scheme days after the March 11 quake, the BOJ preferred to spend more time examining the impact the step would have on the economy.
But he also left open the possibility of easing monetary policy further if damage from the quake proved bigger than expected, stressing that the central bank was focusing on downside risks to growth for the time being.
In a sign some in the BOJ were more cautious about the economic outlook than Shirakawa, Deputy Governor Kiyohiko Nishimura proposed on Thursday expanding the central bank’s asset buying scheme by 5 trillion yen ($62 billion).
While the proposal was outvoted by the board, some market players said it may be a sign the BOJ may loosen policy as early as next month.
And loosen it will, because unfortunately as the past 30 years have shown, the country at this point has no other choice but to take the same toxic medicine which merely removes the symptoms briefly, while making the underlying problems far worse. Also, with the Fed threatening to end QE2 in precisely two months, someone out there has to be dumping hundreds of billions in infinitely dilutable 1 and 0s into primary dealer prop desks. Furthermore, as shown above, the BOJ needs not to buy securities outright: tinkering with the shadow economy in the form of the repo market will provide just as desirable an outcome… If, of course, said outcome is to see gold and silver continue on their relentless rise to new all time record highs. And/or higher. Because the only thing limiting the price of gold is price stupidity and the amount of paper money in existence. Both are infinite.
The latest projections from the Japanese Finance Ministry regarding the fiscal year which started on April 1 make for sobering reading. They say that Japan’s “public” (funded) debt will probably rise by 5.8 percent this year – to 997.7 TRILLION Yen ($US 12.2 TRILLION at current exchange rates). Should these projections be even slightly on the optimistic side – and government financial projections always are – then Japan could easily be looking at a public debt of 1,000 TRILLION Yen by March 31, 2012.
There is another way of expressing 1,000 TRILLION. It is the same as ONE QUADRILLION.
The sheer magnitude of these numbers has long been a talking point for the watchers of international finance. Now, they are becoming very nervous indeed. The OECD has recently “urged” the Japanese government to “do something” about their deficits, especially in the wake of the earthquake disaster. Noting that Japanese sovereign debt is about to hit 204 percent of GDP, they suggested that Japan’s current sales tax be “at least” doubled from its present 5 percent to 10 percent. The Japanese Foreign Ministry politely declined to comment on this suggestion, contenting themselves with assuring the OECD that – “We will continue to work to maintain and secure trust in Japanese government bonds.”
At this, a line from Rosencrantz and Guildenstern are Dead comes to mind: “Eternity’s a terrible thought. I mean, where’s it all going to end?” While this has been mostly a rhetorical question over the ages, G7 central planners are set to provide a definitive answer very soon.
(and people worry about the “bubble” in precious metals)
Read the entire article HERE.
By Scott Lanman
Apr 27, 2011 10:38 AM PT
Federal Reserve policy makers said the economy is recovering at a “moderate pace” and a pickup in inflation is likely to be temporary, as they agreed to finish $600 billion of bond purchases on schedule in June.
“The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually,” the Federal Open Market Committee said today in its statement after a two-day meeting in Washington. “Increases in the prices of energy and other commodities have pushed up inflation in recent months,” and the Fed expects “these effects to be transitory,” the statement said.
Chairman Ben S. Bernanke has signaled he’ll maintain record stimulus until job growth accelerates and the recovery is robust enough to withstand tighter credit. The Fed chief has said he expects that a surge this year in fuel and food costs will have only a passing inflationary impact, differing with Fed regional bank presidents who say borrowing costs may need to rise to contain prices.
Stocks rose and the dollar weakened after the statement. The Dow Jones Industrial Average advanced 0.3 percent to 12,636.62 at 1:33 p.m. in New York. The dollar fell to $1.4706 per euro from $1.4644 late yesterday.
‘Prepared to Adjust’
The Fed, discussing its securities portfolio, said it “is prepared to adjust those holdings as needed to best foster maximum employment and price stability.” Bernanke will discuss the FOMC statement and the panel’s updated economic projections today at his first news conference, scheduled to begin at 2:15 p.m. in Washington.
The FOMC’s characterization of the recovery as “moderate” is similar to the description in the Fed’s Beige Book regional business survey this month and compares with the committee’s March 15 statement saying the economy is on a “firmer footing.”
“The Fed’s view of the world hasn’t changed very much,” Gary Stern, former president of the Minneapolis Fed, said in an interview with Bloomberg Radio. “They continue to emphasize the transitory nature of inflation” and “continue to talk about the economy improving at a moderate pace.”
The Fed left its benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and retained a pledge in place since March 2009 to keep it “exceptionally low” for an “extended period.” The central bank will keep reinvesting proceeds of maturing mortgage debt purchased in the first round of large-scale asset purchases that lasted from December 2008 to March 2010.
“The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate” for stable prices and maximum employment, the Fed said. The “depressed” housing industry remains a weak spot in the economy, it said.
The Fed repeated that it will “pay close attention to the evolution of inflation and inflation expectations.”
Bond markets share the Fed’s assessment that inflation will be transitory. Traders expect inflation, as measured by the difference between Treasury Inflation Protected Securities and nominal bonds, to be 2.62 percent over the next two years and then moderate to 2.39 percent over the next five years.
Today’s FOMC decision was unanimous for a third consecutive meeting. Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, both skeptics of the second round of so-called quantitative easing who voted for the statement today, have suggested they may favor raising interest rates later this year.
The Fed’s commitment to record stimulus contrasts with the interest-rate increase this month by the European Central Bank and tightening this year by the biggest emerging-market economies, including China, Brazil and India, which face faster inflation.
Bernanke will become the first Fed chairman to conduct a press briefing following an FOMC decision when he takes the microphone at the Fed’s headquarters. His counterparts in Europe, Japan, the U.K. and Canada already hold regular news conferences.
The press conference, to be broadcast on television and the central bank’s website, marks one of Bernanke’s biggest efforts to improve the Fed’s connections with the public and demystify the institution, which as recently as 1993 didn’t announce its monetary-policy decisions. Bernanke said in February that the central bank was weighing benefits of more transparency against the risk that his remarks would trigger unwanted fluctuations in financial markets.
The Fed will also release economic projections of governors and regional bank presidents at 2:15 p.m., three weeks sooner than prior practice.
Increases in employment and inflation are helping drive calls to tighten credit. Payrolls have increased by an average 149,000 a month for the past six months, while the unemployment rate has dropped by 1 percentage point since November to 8.8 percent, a two-year low.
Federal Reserve Bank of New York President William C. Dudley, the FOMC’s vice chairman, reiterated in a speech April 1 that a faster pace of job growth is “sorely needed” and that even with 300,000 new jobs per month, the labor market would still have “considerable slack” at the end of 2012.
Janet Yellen, vice chairman of the Fed’s Board of Governors, said April 11 that the increase in food and fuel costs will have only a temporary impact on prices and consumer spending, and warrants no reversal of monetary stimulus.
Food and beverage prices rose in the first quarter by the most since 2008, based on the Labor Department’s Consumer Price Index, while the cost of regular-unleaded gasoline has increased by 26 percent this year to $3.88 a gallon as of yesterday.
The increases helped slow U.S. growth to a 2 percent pace in the first quarter, according to the median estimate of analysts surveyed by Bloomberg News, from 3.1 percent in the prior period. The government releases preliminary figures tomorrow.
The Fed’s preferred price gauge hasn’t flashed a warning. The Commerce Department’s personal consumption expenditures price index, excluding food and energy, rose 0.9 percent in February from a year earlier. Policy makers have a long-run goal for total inflation of about 1.6 percent to 2 percent annually.
Economists say the Fed is at least a few months away from starting to reverse the stimulus. Most of the 44 economists surveyed by Bloomberg News from April 20 to April 25 said the central bank this year will probably halt its policy of replacing maturing mortgage debt with Treasuries. The majority of respondents also said the Fed will announce a plan next year of selling mortgage bonds and Treasuries among its assets.
Since the Fed announced the second round of asset purchases on Nov. 3, yields on 10-year Treasuries increased to 3.31 percent as of yesterday from 2.57 percent, while the Standard & Poor’s 500 Index gained 12 percent, yesterday reaching the highest level since June 2008. The dollar weakened by 3.5 percent to the lowest since August 2008 against an index of six currencies.
In a few months, “the data will probably compel them to begin a gradual process of tightening,” Larry Hatheway, chief economist for UBS Investment Bank in London, said in a Bloomberg Television interview before the decision.
“The Fed is still looking essentially at ex-food, ex- energy prices at core, ticking a little higher,” though not enough to raise interest rates now, Hatheway said.
Bernanke is still seeing objections from politicians within the U.S. and abroad almost six months after the Fed began the unprecedented second round of asset purchases to criticism from Republican politicians and government officials in Germany, China and Brazil.
Senator Mark Kirk, a first-term Republican from Illinois, sent Bernanke a letter on April 25 expressing concern about inflation. He called for an early end to asset purchases should Bernanke “also find the trends that I have now heard widely about.”
Russian Prime Minister Vladimir Putin said last week that compared with the U.S., his country doesn’t have the “same opportunity to make trouble.” The U.S. is “financing the government by using a printing press,” he said.
Some U.S. companies are benefiting from global growth. Atlanta-based United Parcel Service Inc., the world’s largest package-delivery company, yesterday raised its full-year profit forecast after increased international shipping demand pushed first-quarter earnings higher than analysts estimated.
Firms are also coping with inflation. Beaverton, Oregon- based Nike Inc., the world’s biggest sporting goods company, said last month it would raise prices. The increases will come on a “wide range of footwear and apparel styles to help mitigate the overall impact of higher input costs,” and the company will carry out “more significant price increases” in 2012, Chief Financial Officer Don Blair said March 17.
Today marked the first time the Fed’s statement was released at about 12:30 p.m. after more than a decade of aiming for 2:15 p.m. The central bank said last month it will provide the statement at 12:30 p.m. during the four two-day meetings when Bernanke has his press conferences and 2:15 p.m. for the other four one-day FOMC meetings.
Read the entire article HERE.
April 27, 2011
Board of Governors of the Federal Reserve System
For immediate release
Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
For release at 2:15 p.m. EDT
The Federal Reserve Board and the Federal Open Market Committee on Wednesday released the attached table summarizing the economic projections made by Federal Reserve Board members and Federal Reserve Bank presidents for the April 26-27 meeting of the Committee.
The table will be incorporated into a summary of economic projections released on May 18 with the minutes of the April 26-27 meeting. Summaries of economic projections are released on an approximately quarterly schedule.
Vice Chair Janet L. Yellen
At the Economic Club of New York
New York, New York
April 11, 2011
Good afternoon. For more than a century, the Economic Club of New York has provided an influential forum for the discussion of social, political and economic challenges facing the nation, and I appreciate very much your inviting me to speak today. My comments will focus on recent increases in commodity prices and the effects of those developments on the outlook for inflation, the economic recovery now under way, and the appropriate stance of monetary policy. Let me emphasize at the outset that these remarks reflect my own views and not those of others in the Federal Reserve System.1
Since early last summer, the prices of oil, agricultural products, and other raw materials have risen significantly. For example, the price of Brent crude oil has risen more than 70 percent and the price of corn has more than doubled; more broadly, the Commodity Research Bureau’s index of non-fuel commodity prices has risen roughly 40 percent. The imprint of these increases has become increasingly visible in overall measures of inflation. For example, inflation as measured by the price index for personal consumption expenditures (PCE) moved up to an annual rate of about 4 percent over the three months ending in February after having averaged less than 1-1/2 percent over the preceding two years. Moreover, survey data suggest that surging prices for gasoline and food have pushed up households’ near-term inflation expectations and are making consumers less confident about their economic circumstances.
Some observers have attributed the recent boom in commodity prices to the highly accommodative stance of U.S. monetary policy, including the marked expansion of the Federal Reserve’s balance sheet and the maintenance of the target federal funds rate at exceptionally low levels. Such an interpretation of recent developments naturally leads to the conclusion that the Federal Open Market Committee (FOMC) should move promptly toward firmer monetary conditions. Indeed, some have even raised the specter of a return to the high inflation of the 1970s in arguing for the urgency of monetary policy tightening.
Increases in energy and food prices are, without doubt, creating significant hardships for many people, both here in the United States and abroad. However, the implications of these increases for how the Federal Reserve should respond in terms of monetary policy must be considered very carefully. In my remarks today, I will make the case that recent developments in commodity prices can be explained largely by rising global demand and disruptions to global supply rather than by Federal Reserve policy. Moreover, empirical analysis suggests that these developments, at least thus far, are unlikely to have persistent effects on consumer inflation or to derail the recovery. Critically, so long as longer-run inflation expectations remain stable, the increases seen thus far in commodity prices and headline consumer inflation are not likely, in my view, to become embedded in the wage and price setting process and therefore are not likely to warrant any substantial shift in the stance of monetary policy. An accommodative monetary policy continues to be appropriate because unemployment remains elevated, and, even now, measures of underlying inflation are somewhat below the levels that FOMC participants judge to be consistent, over the longer run, with our statutory mandate to promote maximum employment and price stability.
While I continue to anticipate a gradual economic recovery in the context of price stability, I do recognize that further large and persistent increases in commodity prices could pose significant risks to both inflation and real activity that could necessitate a policy response. The FOMC is determined to ensure that we never again repeat the experience of the late 1960s and 1970s, when the Federal Reserve did not respond forcefully enough to rising inflation and allowed longer-term inflation expectations to drift upward. Consequently, we are paying close attention to the evolution of inflation and inflation expectations.
Sources of the Recent Rise in Commodity Prices
Let me now turn to a discussion of the sources of the recent increase in commodity prices. In my view, the run-up in the prices of crude oil, food, and other commodities we’ve seen over the past year can best be explained by the fundamentals of global supply and demand rather than by the stance of U.S. monetary policy.
In particular, a rapid pace of expansion of the emerging market economies (EMEs), which played a major role in driving up commodity prices from 2002 to 2008, appears to be the key factor driving the more recent run-up as well. Although real activity in the EMEs slowed appreciably immediately following the financial crisis, those economies resumed expanding briskly by the middle of 2009 after global financial conditions began improving, with China–which has accounted for roughly half of global growth in oil consumption over the past decade–again leading the way. By contrast, demand for commodities by the United States and other developed economies has grown very slowly; for example, in 2010 overall U.S. consumption of crude oil was lower in than in 1999 even though U.S. real gross domestic output (GDP) has risen more than 20 percent since then. On the supply side, heightened concerns about oil production in the Middle East and North Africa have recently put significant upward pressure on oil prices, while droughts in China and Russia and other weather-related supply disruptions have contributed to the jump in global food prices.
In contrast, the arguments linking the run-up in commodity prices to the stance of U.S. monetary policy do not seem to hold up to close scrutiny. In particular, some observers have pointed to dollar depreciation, speculative behavior, and international monetary linkages as key channels through which accommodative U.S. monetary policy might be exacerbating the boom in commodity markets. Let me address each of these possibilities in turn.
First, it does not seem reasonable to attribute much of the rise in commodity prices to movements in the foreign exchange value of the dollar. Since early last summer, the dollar has depreciated about 10 percent against other major currencies, and of that change, my sense is that only a limited portion should be attributed to the Federal Reserve’s initiation of a second round of securities purchases. By comparison, as I noted earlier, crude oil prices have risen more than 70 percent over the same period, and nonfuel commodity prices are up roughly 40 percent. Put another way, commodity prices have risen markedly in all major currencies, not just in terms of U.S. dollars, suggesting that the evolution of the foreign exchange value of the dollar can explain only a small fraction of those increases.
A second potential concern is that U.S. monetary policy is boosting commodity prices by reducing the cost of holding inventories or by fomenting “carry trades” and other forms of speculative behavior. But here, too, the evidence is not compelling. Price increases have been prevalent across a wide range of commodities, even those that are associated with little or no trading in futures markets. Moreover, if speculative transactions were the primary cause of rising commodity prices, we would expect to see mounting inventories of commodities as speculators hoarded such commodities, whereas in fact stocks of crude oil and agricultural products have generally been falling since last summer.2
A third concern expressed by some observers is that the exceptionally low level of U.S. interest rates has translated into excessive monetary stimulus in the EMEs. In particular, even though their economies have been expanding quite rapidly, many EMEs have been reluctant to raise their own interest rates because of concerns that higher rates could lead to further capital inflows and boost the value of their currencies. Some argue that their disinclination to tighten monetary policy has in turn resulted in economic overheating that has generated further upward pressures on commodity prices.
I do not think this explanation accounts for much of the surge in commodity prices, in part because I believe that the bulk of the rapid economic growth in EMEs mainly reflects fundamental improvements in productive capacity, as those countries become integrated into the global economy, rather than loose monetary policies. Irrespective of monetary conditions in the advanced foreign economies, it is clear that the monetary and fiscal authorities in the EMEs have a range of policy tools to address any potential for overheating in their economies if they choose to do so. Indeed, in light of the relatively high levels of resource utilization and inflationary pressures that many EMEs face at present, monetary tightening and currency appreciation might well be appropriate for those economies.
The Outlook for Consumer Prices
Turning now to the outlook for U.S. consumer prices, I anticipate that the recent surge in commodity prices will cause headline inflation to remain elevated over the next few months. However, I expect that consumer inflation will subsequently revert to an underlying trend that remains subdued, so long as increases in commodity prices moderate and longer run inflation expectations remain reasonably well-anchored.
Underlying Inflation Trends
Focusing on inflation prospects over the medium term is essential to the formulation of monetary policy because, due to lags, the medium term is the timeframe over which the FOMC’s actions can influence the economy. For this purpose, economists have constructed a variety of measures to separate underlying persistent movements in inflation from more transitory fluctuations. These measures include “core” inflation, which excludes changes in the prices of food and energy, and “trimmed mean” inflation, which exclude prices exhibiting the largest increases or decreases in any given month.
No single measure of underlying inflation is perfect, but it is notable that these measures have exhibited a remarkably consistent pattern since the onset of the recession: All show the underlying inflation rate declining markedly to a level somewhat below the rate of 2 percent or a bit less that FOMC participants consider to be consistent with the Fed’s dual mandate. For example, core PCE price inflation stood at less than 1 percent over the 12 months ending in February, down from 2-1/2 percent over the year prior to the recession. Trimmed-mean measures of inflation have also trended down over the past couple of years and are now close to 1 percent.
I want to emphasize that this focus on core and other inflation measures that may exclude recent increases in the cost of gasoline and other household essentials is not intended to downplay the importance of these items in the cost of living or to lower the bar on the definition of price stability. The Federal Reserve aims to stabilize inflation across the entire basket of goods and services that households purchase, including energy and food. Rather, we pay attention to core inflation and similar measures because, in light of the volatility of food and energy prices, core inflation has been a better forecaster of overall inflation in the medium term than overall inflation itself has been over the past 25 years.3
In my view, the marked decline in these trend measures of inflation since the intensification of the crisis largely reflects very low rates of resource utilization. Strong productivity gains have also played a role in holding down inflation because, together with low wage inflation, they have markedly restrained the rise in firms’ production costs. With resource slack likely to diminish only gradually over the next few years, it seems reasonable to anticipate that underlying inflation will remain subdued for some time, provided that longer-term inflation expectations remain well contained.
Longer-Run Inflation Expectations
In this regard, surveys and financial market data indicate that longer-run inflation expectations remain reasonably well anchored even though near-term inflation expectations have jumped in the wake of the surge in commodity prices. For example, the Thomson Reuters/ University of Michigan Survey of Consumers indicates that median inflation expectations for the coming year moved up about 1-1/4 percentage points in March, whereas the median expectation for inflation over the next 5 to 10 years increased only 1/4 percentage point. While such movements obviously bear watching, I would note that such a combination–namely, a substantial jump in near-term inflation expectations coupled with a relatively modest uptick in longer-run expectations–has often accompanied previous sharp increases in gasoline prices, and when it did, those movements were largely reversed within a few months.4
Information derived from the Treasury inflation-protected securities (TIPS) market also suggests that financial market participants’ longer-term inflation expectations remain well anchored even as the near-term outlook for inflation has shifted upward. In particular, while the carry-adjusted measure of inflation compensation for the next five years has increased about 1/4 percentage point since earlier this year, forward inflation compensation at longer horizons is roughly unchanged on net. Much of the increase in five-year inflation compensation has been associated with the surge in food and energy prices, and the level of this measure appears consistent with a normal cyclical recovery after adjusting for those effects.
Commodity Prices and Inflation
Now I would like to explain in further detail why I anticipate that recent increases in commodity prices are likely to have only transitory effects on headline inflation. The current configuration of quotes on futures contracts–which can serve as a reasonable benchmark in gauging the outlook for commodity prices–suggests that these prices will roughly stabilize near current levels or even decline in some cases. If that outcome materializes, the prices of gasoline and heating oil are likely to flatten out fairly soon, and retail food prices are likely to continue rising briskly for only a few more months. Consequently, the direct effects of the surge in commodity prices on headline consumer inflation should diminish sharply over coming months.
Over time, I anticipate that the recent surge in commodity prices will also affect the prices of a broader range of consumer goods and services that use these commodities as inputs. Many firms are seeing such costs escalate and will pass along at least part of these increased raw materials costs to their customers. Nevertheless, I expect the overall inflationary consequences of these pass-through effects to be modest and transitory, provided that longer-run inflation expectations remain well anchored. Moreover, labor costs per unit of output–the single largest component of the unit cost of producing goods and services in the business sector–are essentially unchanged since 2007, owing to both moderate wage increases and solid productivity gains. I expect that nominal wage growth and labor costs will continue to be restrained by slack in resource utilization. Indeed, it would be difficult to get a sustained increase in inflation as long as growth in nominal wages remains as low as we have seen recently.
My expectation regarding the transitory effects of commodity price shocks on consumer inflation is supported by simulation results from the FRB/US model–a macroeconometric model developed at the Federal Reserve Board and used extensively for policy analysis. Starting from a situation in which inflation is running at 2 percent and households and firms expect the FOMC to keep it there in the longer run, the model predicts that a persistent increase of $25 per barrel in the price of crude oil–that is, a rise similar to what we’ve experienced since last summer–would cause the PCE price index to rise at an annual rate of nearly 4 percent over the first two quarters following the shock. Beyond that horizon, however, total PCE inflation drops quickly to about 2-1/4 percent and then declines gradually back to its longer-run rate of 2 percent.
These fairly modest and transitory effects of an oil price shock are also consistent with the response of the U.S. economy to the dramatic run-up in commodity prices from 2002 to 2008. Indeed, while oil prices more than quadrupled over that period, measures of underlying inflation remained close to 2 percent. In my view, that outcome was crucially dependent on the stability of longer-run inflation expectations, which in turn limited the pass-through of higher production costs to consumer prices.
Risks to the Inflation Outlook
I have argued that recent commodity price shocks are likely to have only a transitory effect on inflation. But even if such a trajectory for inflation is most likely, some specific risks must be considered. First, while futures markets suggest that commodity prices will stabilize near current levels, these prices cannot be predicted with much confidence. For example, oil prices could move markedly higher or lower as a consequence of geopolitical developments, changes in production capacity, or shifts in the growth outlook of the EMEs.
In addition, the indirect effects of the commodity price surge could be amplified substantially if longer-run inflation expectations started drifting upward or if nominal wages began rising sharply as workers pressed employers to offset realized or prospective declines in their purchasing power.
Indeed, a key lesson from the experience of the late 1960s and 1970s is that the stability of longer-run inflation expectations cannot be taken for granted. At that time, the Federal Reserve’s monetary policy framework was opaque, its measures of resource utilization were flawed, and its policy actions generally followed a stop-start pattern that undermined public confidence in the Federal Reserve’s commitment to keep inflation under control. Consequently, longer-term inflation expectations became unmoored, and nominal wages and prices spiraled upward as workers sought compensation for past price increases and as firms responded to accelerating labor costs with further increases in prices. That wage-price spiral was eventually arrested by the Federal Reserve under Chairman Paul Volcker, but only at the cost of a severe recession in the early 1980s.
Since then, the Federal Reserve has remained determined to avoid those mistakes and to keep inflation low and stable. It will be important to closely monitor the state of longer-term inflation expectations to ensure that the Federal Reserve’s credibility, which has been built up over the past three decades, remains fully intact.
The Outlook for the Real Economy
Turning now to the real economy, real gross domestic product (GDP) has been rising since mid-2009 and now exceeds its level just prior to the onset of the recession. While GDP growth during late 2009 and early 2010 was largely the result of inventory restocking and fiscal stimulus, private final sales growth has picked up over the past six months–an encouraging sign. At the same time, measures of business sentiment have generally returned to pre-recession levels, factory output has been expanding apace, and the unemployment rate has dropped by a percentage point over the past few months.
Real consumer spending–which had been rising at a brisk pace in the fall–slowed somewhat around the turn of the year, and measures of consumer sentiment declined in March. Those developments may partly reflect the extent to which higher food and energy prices have sapped households’ purchasing power. More generally, however, as the improvement in the labor market deepens and broadens, households should regain some of the confidence they lost during the recession, providing an important boost to spending.
Broad Contours of the Outlook
Nonetheless, a sharp rebound in economic activity–like those that often follow deep recessions–does not appear to be in the offing. One key factor restraining the pace of recovery is the construction sector, which continues to be hampered by a considerable overhang of vacant homes and commercial properties and remains in the doldrums. In addition, spending by state and local governments seems likely to remain limited by tight budget conditions.
Moreover, while the labor market has recently shown some signs of life, job opportunities are still relatively scarce. The unemployment rate is down from its peak, but at 8.8 percent, it still remains quite elevated. And even the decline that we’ve seen to date partly reflects a drop in labor force participation, because people are counted as unemployed only if they are actively looking for work.
Some observers have argued that the high unemployment rate primarily reflects structural factors such as a longer duration of unemployment benefits and difficulties in matching available workers with vacant jobs rather than a deficiency of aggregate demand. In my view, however, the preponderance of available evidence and research suggests that these alternative structural explanations cannot account for the bulk of the rise in the unemployment rate during the recession. For example, if mismatches were of central importance, we would not expect to see high rates of unemployment across the vast majority of occupations and industries. Instead, I see weak demand for labor as the predominant explanation of why the rate of unemployment remains elevated and rates of resource utilization more generally are still well below normal levels.
Commodity Prices and the Real Economy
As I have indicated, the recent run-up in commodity prices is likely to weigh somewhat on consumer spending in coming months because it puts a painful squeeze on the pocketbooks of American households.5 In particular, higher oil prices lower American income overall because the United States is a major oil importer and hence much of the proceeds are transferred abroad. Monetary policy cannot directly alter this transfer of income abroad, which primarily reflects a change in relative prices driven by global demand and supply balances, not conditions in the United States. Thus, an increase in the price of crude oil acts like a tax on U.S. households, and like other taxes, tends to have a dampening effect on consumer spending.6
The surge in commodity prices may also dampen business spending. Higher food and energy prices should boost investment in agriculture, drilling, and mining but are likely to weigh on investment spending by firms in other sectors. Assuming these firms are unable to fully pass through higher input costs into prices, they will experience some compression in their profit margins, at least in the short run, thereby causing a decline in the marginal return on investment in most forms of equipment and structures.7 Moreover, to the extent that higher oil prices are associated with greater uncertainty about the economic outlook, businesses may decide to put off key investment decisions until that uncertainty subsides. Finally, with higher oil prices weighing on household income, weaker consumer spending could discourage business capital spending to some degree.
Fortunately, considerable evidence suggests that the effect of energy price shocks on the real economy has decreased substantially over the past several decades. During the period before the creation of the Organization of the Petroleum Exporting Countries (OPEC), cheap oil encouraged households to purchase gas-guzzling cars while firms had incentives to use energy-intensive production techniques. Consequently, when oil prices quadrupled in 1973-74, that degree of energy dependence resulted in substantial adverse effects on real economic activity. Since then, however, energy efficiency in both production and consumption has improved markedly.
Consequently, while the recent run-up in commodity prices is likely to weigh somewhat on consumer and business spending in coming months, I do not anticipate that those developments will greatly impede the economic recovery as long as these trends do not continue much further. For example, the simulation of the FRB/US model that I noted earlier indicates that a persistent increase of $25 per barrel in oil prices would reduce the level of real GDP about 1/2 percent over the first year and a bit more thereafter. The magnitude of that effect seems broadly consistent with the estimates of professional forecasters; for example, the Blue Chip consensus outlook for real GDP growth has edged down only modestly in recent months.
Monetary Policy Considerations
Let me now turn to the stance of monetary policy. As you know, monetary policy has been highly accommodative since the financial crisis intensified. In December 2008, the FOMC lowered the target federal funds rate to near zero and started to provide forward guidance concerning its likely future path. As in its statements since March 2009, the Committee reiterated last month that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” In addition, the FOMC has purchased a substantial volume of agency debt, agency mortgage-backed securities, and longer-term Treasury securities. The Committee initiated a second round of Treasury purchases last November and has indicated that it intends to complete those purchases by the end of June. My reading of the evidence is that these securities purchases have proven effective in easing financial conditions, thereby promoting a stronger pace of economic recovery and checking undesirable disinflationary pressures.
I believe this accommodative policy stance is still appropriate because unemployment remains elevated, longer-run inflation expectations remain well anchored, and measures of underlying inflation are somewhat low relative to the rate of 2 percent or a bit less that Committee participants judge to be consistent over the longer term with our statutory mandate. However, there can be no question that sometime down the road, as the recovery gathers steam, it will become necessary for the FOMC to withdraw the monetary policy accommodation we have put in place. That process will involve both raising the target federal funds rate over time and gradually normalizing the size and composition of our security holdings. Importantly, we are confident that we have the tools in place to withdraw monetary stimulus, and we are prepared to use those tools when the right time comes.
Of course, there are risks to the outlook that may affect the timing and pace of monetary policy firming. In my view, however, even additional large and persistent shocks to commodity prices might not call for any substantial change in the course of monetary policy as long as inflation expectations remain well anchored and measures of underlying inflation continue to be subdued. As I noted earlier, a surge in commodity prices unavoidably impairs performance with respect to both aspects of the Federal Reserve’s dual mandate: Such shocks push up unemployment and raise inflation. A policy easing might alleviate the effects on employment but would tend to exacerbate the inflationary effects; conversely, policy firming might mitigate the rise in inflation but would contribute to an even weaker economic recovery. Under such circumstances, an appropriate balance in fulfilling our dual mandate might well call for the FOMC to leave the stance of monetary policy broadly unchanged.
That said, in light of the experience of the 1970s, it is clear that we cannot be complacent about the stability of inflation expectations, and we must be prepared to take decisive action to keep these expectations stable. For example, if a continued run-up in commodity prices appeared to be sparking a wage-price spiral, then underlying inflation could begin trending upward at an unacceptable pace. Such circumstances would clearly call for policy firming to ensure that longer-term inflation expectations remain firmly anchored.
In summary, the surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply. These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy. However, my colleagues and I are paying close attention to the evolution of inflation and inflation expectations, and we are prepared to act as needed to help ensure that inflation, over time, is at levels consistent with our statutory mandate.
Read the original article HERE.
Phoenix Capital Research
02/07/2011 12:08 -0500
We’ve been over the numerous BS excuses that US Dollar destroyer extraordinaire Ben Bernanke has made for QE enough times that today I’d rather simply focus on the REAL reason he continues to funnel TRILLIONS of Dollars into the Wall Street Banks.
I’ve written this analysis before. But given the enormity of what it entails, it’s worth repeating. The following paragraphs are the REAL reason Bernanke does what he does no matter what any other media outlet, book, investment expert, or guru tell you.
Bernanke is printing money and funneling it into the Wall Street banks for one reason and one reason only. That reason is: DERIVATIVES.
According to the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter 2010 (most recent), the notional value of derivatives held by U.S. commercial banks is around $223.4 TRILLION.
Five banks account for 95% of this. Can you guess which five?
Looks a lot like a list of the banks that Ben Bernanke has focused on bailing out/ backstopping/ funneling cash since the Financial Crisis began doesn’t it? When you consider the insane level of risk exposure here, you can see why the TRILLIONS he’s funneled into these institutions has failed to bring them even to pre-Lehman bankruptcy levels.
Ben Bernanke is a stooge and a fraud, but he is at least partially honest in his explanations of why he wants to keep printing money. The reason is to try to keep interest rates low. Granted he’s failing miserably at this, but at least he understands the goal.
Of course, Bernanke tells the public and Congress that the reason we need low interest rates is to support housing prices. He doesn’t mention that $188 TRILLION of the $223 TRILLION in notional value of derivatives sitting on the Big Banks’ balance sheets is related to interest rates.
Yes, $188 TRILLION. That’s thirteen times the US’s entire GDP and nearly four times WORLD GDP.
Now, of course, not ALL of this money is “at risk,” since the same derivatives can be traded/ spread out dozens of ways by different banks as a means of dispersing risk.
However, given the amount of money at stake, if even 4% of this money is “at risk” and 10% of that 4% goes wrong, you’ve wiped out ALL of the equity at the top five banks.
Put another way, Bank of America, JP Morgan, Goldman, and Citibank would CEASE to exist.
If you think that I’m making this up or that Bernanke doesn’t know about this, consider that his predecessor, Alan Greenspan, knew as early as 1999 that the derivative market, if forced into the open and through a public clearing house would “implode” the market. This is DOCUMENTED. And you better believe Greenspan told Bernanke this.
In this light all of Bernanke’s monetary policies and efforts are focused on doing one thing and one thing only: trying to shore up the overleveraged, derivative-riddled balance sheets of the Too Big to Fails.
The fact that the bank executives taking this money and using it to pay themselves and their employees record bonuses only confirms that these folks have NO interest in taking care of shareholders or their businesses. They’re just going to take the money and run for as long as this scheme works.
I don’t know when this will come unraveled. But it WILL. At some point the $600+ TRILLION behemoth that is the derivatives market will implode again. When it does, no amount of money printing will save the Too Bloated To Exist banks’ balance sheets.
At that point, it’s game over for Wall Street and the Fed.
Read the entire article HERE.