Monetary Watch, FOMC one step closer to QE II
The Federal Reserve put its finger on the trigger at September’s FOMC meeting, proclaiming to the world that QE II could very well be at hand.
As discussed in THE CONTRARIAN TAKE’s September Monetary Watch, as scripted by Bernanke at Jackson Hole, the FOMC, citing deteriorating economic conditions and subdued price inflation, put one of their three QE tools into action. The FOMC modified its communiqué, guaranteeing whatever amount of money necessary to stimulate economic growth should economic and/or financial market conditions continue to deteriorate. And for all those who might be concerned about the impact that flood of money will have on prices, the FOMC says not to worry. True to form, it made crystal clear that price inflation is simply nowhere in sight. In fact, it is patently too low. And given all the resource slack in the economy, the Federal Reserve should be able to print all the money it wants.
Here’s the FOMC statement, bold italics are THE CONTRARIAN TAKE:
Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.
Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
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 also will maintain its existing policy of reinvesting principal payments from its securities holdings.
The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.
In the opinion of the THE CONTRARIAN TAKE, Bernanke and the FOMC have played their hand. If economic conditions worsen, its checkmate for the Bernanke led FOMC – they have to act. As discussed in September’s Monetary Watch, the CONTRARIAN TAKE fully expects economic conditions to worsen, perhaps quite soon. And, as Bernanke told us at Jackson Hole, that means another round of asset monetization and/or a cut in the interest rate that the Federal Reserve pays on excess reserves. And that means the money supply, on THE CONTRARIAN TAKE’s TMS2 metric growing at an already robust 1o.7% rate, is about to get a steroid injection courtesy of the Federal Reserve.
Before ending this brief missive, a word on Ben Bernanke, the economist. If ever there was a deflation hawk, this man is it. This is an economist that is absolutely convinced that it was the Federal Reserve and its tight monetary policy before and after the 1929 stock market crash that gave us the Great Depression, that the correct policy response by the Federal Reserve post the stock market crash was to print money and to continue printing money until economic recovery was assured. As discussed in September’s Monetary Watch, Austrians know the opposite to be true – that it is easy money policies that create artificial booms, that sooner or later those booms require busts, and that fighting busts with more easy money policies only adds insult to injury and creates even bigger busts down the line.
But be that as it may, it is why a Bernanke led Federal Reserve virtually guarantees more monetary inflation. Bernanke, in his mind, is not about to repeat the supposed mistakes of his predecessors at the Federal Reserve. Indeed, having been scared to death by the credit implosion of 2008-2009, Bernanke can be expected to move and move fast, with a printing press under each arm when the economy takes another negative turn.
By the looks of it, that move may be only a few bad economic reports away.
Based on the monetary insights of the Austrian school of economics, THE CONTRARIAN TAKE offers up the latest monthly money supply metrics for the U.S., Eurozone and Japan currency blocks.
To see the entire monthly series offering – the latest money supply data for all three currency blocks, with full historical data and chart work, as well as supporting definitions, sources, notes and references – click here on Austrian Money Supply.
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