Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
Why This Stocks Bubble Is Actually WORSE Than the Internet Tech Bubble - 4th Aug 15
Gold Investing: Use the Cockroach Strategy - 4th Aug 15
I’m Ready for a Stocks Bear Market. Are You? - 4th Aug 15
Top 6 Myths Driving Oil Prices Down - 4th Aug 15
Is This Stocks Bull Market Summit? - 4th Aug 15
EURUSD: An Ending Diagonal Triangle in Action - 4th Aug 15
Crude Oil Price at Levels Not Seen Since March - 4th Aug 15
The Troika Loan Shark Stock Market Rally  - 4th Aug 15
Plan for Surviving Gold's Summer of Discontent - 4th Aug 15
Stock Market SPX Triggers Sell Signal - 3rd Aug 15
The Gold Investment Demand Juggernaut - 3rd Aug 15
Stock Market Pullback at Hand, Gold About to Rally? - 3rd Aug 15
Gold – The More Hate, The More Bullish We Become - 3rd Aug 15
Stock Market Critical Week Ahead - 3rd Aug 15
Gold Price Near Intermediate Bottom - 3rd Aug 15
Stock Market Reluctant Primary Wave IV? - 2nd Aug 15
Power and Compassion - 2nd Aug 15
Preparing for The Stock Market Crash - Inverse ETFs and Puts Timing... - 2nd Aug 15
Commodity Prices Slump Signals Slow Economic Growth Outlook - 2nd Aug 15
BSE Sensex Stocks Bear Market Underway - 2nd Aug 15
What Microsoft’s Dismal Earnings Report Really Tells You - 2nd Aug 15
Gold And Silver Charts Are The Compelling Story. Fundamentals Do Not Apply - 2nd Aug 15
The Fed Can't Stop the Commodity Bear Market - 1st Aug 15
Meet the Leader Who Turned Google Into a “Buy” - 1st Aug 15
The Greek Coup: Liquidity as a Weapon of Coercion - 1st Aug 15
Gold’s Amazing Resiliency - 31st July 15
Silver – A Century of Prices - 31st July 15
Demand for Gold Bullion Surges – Perth Mint, and U.S. Mint Cannot Meet Demand - 31st July 15
Reasons Why the Greek Crisis Will Only Get Worse - 30th July 15
The War On Cash: Why Now? - 30th July 15
Greece - The IMF Experts Flunk, Again - 30th July 15
Threat Of Cyber Warfare the “Other Reason To Own Physical Gold” Warns Rickards - 30th July 15
The 5 Biggest Myths and Lies about the Middle East - 30th July 15
Greece, Diversion, and the New World Order - 30th July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

Stealth QE3 Comes to Fruition, Soaring Inflation is Next

Economics / Inflation Jun 23, 2011 - 12:57 PM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleDavid Zeiler writes: U.S. Federal Reserve Chairman Ben Bernanke did what most everyone expected yesterday (Wednesday) at the culmination of the Federal Open Market Committee's (FOMC) two-day meeting - he left average Americans vulnerable to the pangs of higher prices and soaring inflation.


Indeed, as yet another FOMC meeting drew to a close without any significant policy changes, the central bank, as many predicted, kept interest rates at 0% to 0.25%, where they've been since December 2008.

And citing weaker than expected economic growth, the FOMC vowed to remain in an "accommodative stance" by retaining its huge $2.832 trillion portfolio of securities and loans.

The Fed will do this by using the money from maturing bonds and principal payments from its securities holdings to buy more bonds "according to a distribution that is nearly identical to that executed under the Treasury purchase program," according to the New York Fed statement - an extension of the quantitative easing (QE2) program in all but name.

Money Morning Chief Investment Strategist Keith Fitz-Gerald saw this "stealth mode" QE3 coming.

"Instead of printing more money, the Fed is likely to start reinvesting the proceeds of maturing debt," Fitz-Gerald said. "Ultimately, that won't reduce our government's bloated, toxic balance sheet. But it will change the makeup of that balance sheet - and not for the better."

By keeping interest rates at historic lows and continuing to reinvest in maturing debt, rather than retiring it, the U.S. Federal Reserve runs the risk of feeding an inflation rate that in recent months has risen to uncomfortable levels.

But that's something Bernanke has sought to acknowledge without taking responsibility.

"Inflation has moved up recently, but the [Fed] anticipates that inflation will subside... as the effects of past energy and other commodity price increases dissipate," the FOMC said in its statement.

When judging inflation, the Fed uses the core consumer price index (CPI), which excludes food and energy. In May the core CPI rose 1.5%, the most since January 2010 but below the Fed's informal target of 2%.

In his remarks yesterday, Bernanke said he favors the Fed setting an official inflation target, but the FOMC has set no timetable to do so.

Meanwhile, the full CPI increased 3.6% in May, the most since October 2008. Although the Fed likes the core CPI because it avoids volatility, many - including some within the Fed itself - believe the full CPI more accurately reflects the real-world experience of the U.S. consumer.

"One immediate benefit of dropping the emphasis on core inflation would be to reconnect the Fed with households and businesses who know price changes when they see them," James Bullard, president of the Fed Bank ofSt. Louis, said last month.

Fitz-Gerald was more blunt.

"Companies are, in fact, passing along costs as fast as they can," he observed in May. "McDonald's Corp. (NYSE: MCD), Nestle SA, and Wal-Mart Stores Inc. (NYSE: WMT) are just a few of the companies that have spoken out about the specific impact that higher component and ingredient costs have had on their earnings. Many have adjusted their guidance."

Making inflation even harder on average Americans is an unemployment rate of 9.1% and slumping wages. Average hourly earnings fell 1.6% in May.

Of course, using the core CPI number allows the Fed to sweep inflation rate concerns under the rug to pursue policies it believes will stimulate a stubbornly sluggish U.S. economy.

Yet those policies could ultimately prove ruinous to the U.S. economy.

"Be warned: There is every chance that the Fed will lose control, inflation will spiral - and not just to the ruinous levels we saw in the 1970s, but well beyond them, too," Money Morning Contributing Editor Martin Hutchinson said recently. "Inflation may become much more acute - reaching the excruciating/ruinous 20% to 50% level - rather than reaching and then holding steady at the uncomfortable-but-bearable 10% level.

"Even after that occurs, Bernanke will refuse to launch any sort of significant counterattack, or combat it," Hutchinson continued.

Ultimately, the Fed's buying binge could cause a runaway inflation rate that would create a crisis for the U.S. dollar.

"With the U.S. market straining under the burden of rising inflation and some ill-advised monetary and fiscal moves, the death of the dollar is looming as a worst-case -- but still possible - scenario," Hutchinson said.

Source :http://moneymorning.com/2011/06/23/stealth-qe3-comes-to-fruition-soaring-inflation-is-next/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History