Federal Reserve signals inflation-spiral


At his press conference this week, Fed Chairman Ben Bernanke committed the Federal Reserve to near-zero interest rates until the US unemployment rate falls below 6.5 per cent. Currently, the unemployment rate stands at 7.7 per cent.

Given the massive expansion of federal spending under President Obama, and given the elimination of many unskilled jobs as a result of technical change and out-sourcing, the natural rate of unemployment in the United States may now be as high as 7 per cent. If this is correct, the Federal Reserve will pay for a 6.6 per cent unemployment rate with inflation rates that increase over time more or less rapidly depending on whether rational  or adaptive expectations determine responses to such monetary expansion.

In any event, Bernanke has announced a revolution in US monetary policy. Henceforth monetary policy will not seek to hold inflation to a maximum of two per cent per annum.  It will allow inflation to rise to whatever rate is necessary to lower unemployment to 6.6 per cent in response to near-zero interest rates.

Some apologists will laud this as a move to a nominal GDP target. But they are Obama-sycophant serpents speaking  with forked tongues.

The real objective of such a shift in Fed policy is socialism.

“The best way to destroy the capitalist system is to debauch the currency.” V.I. Lenin

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2 Responses to “Federal Reserve signals inflation-spiral”

  1. Bill Woolsey Says:

    The policy limits inflation to 2.5%.

    If the natural unemployment rate really is 7%, and the quantitative easing and low target interest rates expand spending on output and production and employment up to capacity, and that involves 7% unemployment, and then they continue with quantitative easing and low interest rates, the result will be higher inflation. When inflation hits 2.5%, they say they will start raising their target interest rates (which they can do by reigning in or reversing the quantitative easing as well as paying higher interest on reserves.) That will slow spending on output.

    They are saying inflation will then slow to 2.5%. They actually say that in the longer term they still want it to average 2%.

    Did you miss this about 2.5% inflation in the medium term and a continued 2% target in the long term?

    Obama sycophant? I have trouble taking those partisan battles too seriously.

    Spending on output remains approximately 15% below the trend of the Great Moderation. When it passes that point, you can say, “I told you so.”

    The Divisia measures of the quantity of money are well below the growth paths of the Great Moderation.

    Manipulating interest rates to target inflation was always a bad idea.

    Here is my response to the Fed’s policy.

    http://monetaryfreedom-billwoolsey.blogspot.com/2012/12/new-monetary-policy-fomc-release.html

  2. charlesrowley Says:

    You argue your case well. But there are weak points. First, although the Fed talks about reversing from 2.5 per cent in the long term, that is far from costless. Once inflationary expectations have set in at the higher level or beyond, the cost of reversal is differentially high, as Volcker and Reagan found in the early 1980s. Second, it will be far from easy for the Fed to tighten. Increasingly they hold mortgage debt not T Bills and just think what will happen to those bond prices as mortgage rates begin to climb under inflation. Some of their portfolio will be worthless anyway off-loaded by better-informed holders of junk.
    The real problem that you do not confront is the trigger nature of inflationary expectations in the upward direction. Once they take off, they are hell to bring down. In the meantime, those on fixed incomes truly suffer, as they did during the 1970s.

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