In my previous post I was giving Chopper Ben some props for his the speech he gave in Germany. It was a clever, well scripted, thoughtful, and well prepared speech. Chopper Ben just went up 1 notch in my book. He has a long way to go but this was a strong first step in actually talking about Main Streets problems.
One thing caught my attention. It was his feelings about Inflation.
"Low rates of resource utilization in the United States are creating disinflationary pressures. As shown in figure 5, various measures of underlying inflation have been trending downward and are currently around 1 percent, which is below the rate of 2 percent or a bit less that most Federal Open Market Committee (FOMC) participants judge as being most consistent with the Federal Reserve's policy objectives in the long run. With inflation expectations stable, and with levels of resource slack expected to remain high, inflation trends are expected to be quite subdued for some time."
"Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate. In that regard, it bears emphasizing that the Federal Reserve has worked hard to ensure that it will not have any problems exiting from this program at the appropriate time. The Fed's power to pay interest on banks' reserves held at the Federal Reserve will allow it to manage short-term interest rates effectively and thus to tighten policy when needed, even if bank reserves remain high. Moreover, the Fed has invested considerable effort in developing tools that will allow it to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. If necessary, the Committee could also tighten policy by redeeming or selling securities."
This last part is interesting in the sense that he is stating that the Fed has a mandate to keep inflation in check to the tune of 2%. Now, if CPI prints a little higher in one particular month say .4 or .5 which comes out to way above 2% annualized, does this mean that the Fed will act and stop their QE program? Is he stating that inflation is very tame at the moment so its a good time to try this particular scheme, but if we see upward pressure on the CPI, all bets are off?
My personal opinion is that deflation is much more of a problem then inflation. This is at the moment. The countries biggest asset which are homes are losing value every month. Debt Deflation is the biggest worry. This obviously is the biggest worry that Bernanke has. My plan would be to let housing go through what it needs to go through. Restructure the debt and let bad firms go bust. Capitalism without failure can't exist in our country. Homeowners who don't pay their mortgages should be kicked out of their homes and put in rentals. None of this staying in your home for free for years garbage. Once the banks cleanse their balance sheets, they will start to make prudent lending decisions.
We will see some higher CPI prints in the coming months, the Fed will be worried about this. Who knows if they curtail their POMO's and QE, but one thing is certain, the Fed and Bernanke are letting everyone know the pressure they are under in terms of inflation. Bernanke has made his point about fiscal and trade policies.
Will the market call his bluff about inflation?
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