From L.A. Liberty
Slower growth, higher inflation even if you don’t count oil and food prices:
Fed on Hold Amid Slow Recovery
In updated forecasts released after the meeting, Fed officials lowered their growth forecasts and predicted core inflation would remain higher than previously thought. The economy is now expected to expand at a rate of around 2.7% to 2.9% this year and 3.3% to 3.7% in 2012. That is below estimates given after the last meeting in April for growth of 3.1% to 3.3% in 2011 and 3.5% to 4.2% next year.
The 2011 projection for underlying inflation—stripping out volatile food and energy costs—was raised to between 1.5% and 1.8% from April’s forecast of 1.3% to 1.6%, with core prices expected to ease to 1.4% to 2.0% next year instead of 1.3% to 1.8%. The unemployment rate is expected to decline to 8.6% to 8.9% in 2011 and 7.8% to 8.2% next year, versus previous expectations for a drop to 8.4% to 8.7% and then 7.6% to 7.9% in 2012.
The jobless rate increased to 9.1% in May, a level that would normally call for looser credit. But with underlying inflation also showing the biggest in almost three years, the Fed is in a challenging spot. Consumer prices net of volatile food and energy prices rose to a 1.5% annual rate last month, close to the Fed’s informal target of just under 2.0%.
About the only good news in this is that there won’t be a QE3.
Bloomberg, however, reports
Fed to Maintain Record Stimulus After Ending Treasury Purchases
Fed Chairman Ben S. Bernanke has said record-low interest rates are still needed to spur a recovery that remains “frustratingly slow” two years after the recession ended. Consumer spending has been held back by falling home values, accelerating inflation and an unemployment rate that rose to 9.1 percent last month. At the same time, Bernanke has said growth is likely to pick up as commodity costs recede and factories overcome disruptions of supplies from Japan.
The Fed left its benchmark interest rate in a range of zero to 0.25 percent and repeated a pledge to keep it there “for an extended period.” The decision was unanimous. In his press conference, he said an “extended period” means the Fed is at least two or three meetings from an exit.
Blogging on Latin America at times feels like a cyclical process where you get old stories retold with only a change of names. Now the Fed’s chairman, Ben Bernake, is giving us a sense of deja vu by implementing one of the most failed policies of the 1970s: Rekindling inflation.
You’re probably saying, “you’re kidding me, are you? In less than two years the Fed’s pumped more into the economy than in the previous forty years. The article itself says,
The Fed’s balance sheet has nearly tripled, to about $2.3 trillion, since the financial crisis of 2008
Isn’t that inherently inflationary?”
Not if you’re Ben:
Bernanke Signals Intent to Further Spur Economy
The Federal Reserve chairman, Ben S. Bernanke, sent a clear signal on Friday that the central bank was poised to take additional steps to try to fight persistently low inflation and high unemployment.
Mr. Bernanke noted that “unconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” But he suggested that the Fed was prepared to manage the risks associated with the most powerful tool remaining in the Fed’s arsenal of weapons to stimulate the economy: vast new purchases of government debt to lower long-term interest rates.
As if the problem was high interest rates. Stephen Green has more on that:
The problem with this economy isn’t low interest rates. (Actually, it is a problem — but not in the way the Fed thinks it’s a problem.) The problem with this economy is the fundamental uncertainty created by the endless tax and regulatory schemes foisted on top of it by this viciously anti-free market Administration, and by this Congress, which wouldn’t recognize the Law of Unintended Consequences if it stole Nancy Pelosi’s gavel and banged them all about the head and shoulders with it.
So what’s the problem with low interest rates? Well — rates are so low that it no longer really costs anything to borrow money. And when something’s free, people get stupid. Because prices, as they teach in Econ 101, are information. Prices are signals as to what something is worth. So when the Fed tells everyone that the dollar is essentially worthless — people will behave accordingly.
Borrow money for free? Great — so why risk it in a business venture, when you can stick it into commodities? Because commodities, usually valued in dollars, will go up, up, up, as the Fed continues to print those dollars it then lets you borrow for free. Heck, people could just borrow some of that free money and just convert it into euros for instant profit. Oh, wait — people have been doing just that.
Let’s add something else to the mix. Yes, our economy is frozen in place, thanks to Obamacare, Obamataxhikes, and the undead threat of Cap & Obama. And now the Fed is promising inflation! It’s coming! Here’s yet another fundamental uncertainty — about the very value of the dollars you work and take risk for! — being added on top of everything else.
Stephen also points out that
Every new dollar printed either leaves the country or leaves the productive economy — and reduces the value of every existing dollar.
Too bad Ben couldn’t get a Chinese official to stand next to him while he was giving his speech.
What if the Fed overshoots its target? Fret not, says Ben:
“With these tools in hand, I am confident that the F.O.M.C. [Federal Open Market Committee, which sets monetary policy] will be able to tighten monetary conditions when warranted, even if the balance sheet remains considerably larger than normal at that time,” Mr. Bernanke said.
Ben doesn’t remember the magic word of the 1970s decade: stagflation.
You can read Bernake’s whole Federal Reserve Bank speech here.
A little late, but,
Bernanke Says Bailouts of Banks ‘Unconscionable’
Federal Reserve Chairman Ben S. Bernanke said government bailouts of large financial firms are “unconscionable” and must be ended as part of a regulatory overhaul following the worst financial crisis since the 1930s.
“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms,” Bernanke said today in a speech in Orlando, Florida. “If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.”
While I believe that if any organization is “too big to fail”, it qualifies as a monopoly and should fail, in order to encourage free-market competition, Congress is contemplating otherwise,
Congress is considering a resolution mechanism for financial firms that are so large or interconnected to other institutions that their failure could damage the financial system. A plan by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, would allow the Federal Deposit Insurance Corp. to liquidate a large firm after a panel of bankruptcy judges determines the company is insolvent and with approval of the Fed, FDIC and Treasury Department.
Christopher Dodd, you say? Color me underwhelmed.
If this graphic is not alarming, I don’t know what is:
Arthur Laffer, writing at the WSJ (emphasis added): Get Ready for Inflation and Higher Interest Rates
The unprecedented expansion of the money supply could make the ’70s look benign.
Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That’s more than twice the size of the next largest deficit since World War II. And this projected deficit is the culmination of a year when the federal government, at taxpayers’ expense, acquired enormous stakes in the banking, auto, mortgage, health-care and insurance industries.
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!
What’s coming up next?
It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.
Laffer proposes that the Fed increase reserve requirements on member banks to absorb the excess reserves. I doubt that the Fed is willing to do that.
Expect very high inflation. How high? Time will tell.
There’s a way to nip this in the bud: First, the Treasury and Fed should work together to protect the value of the dollar. Here’s how they do it. At the Fed’s June meeting in two weeks, Ben Bernanke should put in the FOMC minutes a clear reference to an exit strategy that will curb the massive money creation that Art Laffer wrote about in today’s Wall Street Journal. Next, at its September meeting, the Fed should raise its target rate — which is now 0.0 to 0.25 percent — pulling it up to 25 basis points, the upper end of the current range. That’s a small, even tiny, move that would represent about a 12 basis-point hike. But the move would at least send a signal that the Fed has an exit strategy from excess money that it intends to implement. Just that tiny move would go a long way towards protecting the dollar and knocking down inflation fears.
At the same time, the Treasury should purchase dollars in the open market to reinforce the much-neglected King Dollar scenario. In the long-run, Treasury interventions won’t work. But in the short-run, when combined with a Fed exit strategy, a dollar intervention will work.
Let’s hope the Fed does what Kudlow suggests. However, my gut tells me that the guy who couldn’t figure out TurboTax has no idea what Kudlow’s talking about.