John Williams: Fed Money Printing Will Trigger Sell-Off Providing Start Of Hyperinflation10/24/2012
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http://finance.yahoo.com/news/fed-considering-upping-qe3-size-180412234.html
WASHINGTON (MarketWatch) — After historic changes last month, Federal Reserve officials this week will discuss a possible expansion of the size of its third round of bond buying and better ways to guide markets about future policy actions. At its two-day meeting that starts Tuesday, the Fed may abandon its calendar date.approach to forward guidance and adopt some form of numerical target for policy, analysts said. Reuters Federal Reserve Chairman Ben Bernanke (left) speaks with Charles Evans of the Reserve Bank of Chicago in August. The approach of Evans is slowly being adopted by his Fed colleagues. And the central bank consider whether to expand its bond-buying at the end of the year to take account of Treasury purchases under its Operation Twist plan that finishes at year-end. No final decisions are expected when the Federal Open Market Committee releases a statement at 2:15 p.m. Eastern on Wednesday. Economists will parse the summary of the Fed’s deliberations to be released in November 15 for clues to what actions may come at the last meeting of the year in mid-December. After the drama of the central bank’s meeting in September, this week’s meeting is viewed as less of a cliff hanger. Last month, the Fed announced a plan to purchase $40 billion of mortgage-backed securities per month in an open-ended approach that would not be stopped until the labor market improved. While it may not sound like much, the Fed may buy over $1 trillion in MBS based on current forecasts, analysts at Capital Economics estimate. The Fed also took the dramatic step of saying it expects to keep short-term interest rates unchanged even if the recovery strengthens. It also pushed out the calendar date for the expected first rate hike until mid-2015. Read complete analysis of Fed’s September actions There are no pressures on the Fed for immediate action on these two fronts, economists said. “I think they are reasonably comfortable with the market reaction [to QE3] and the way the economy has turned out,” said Michael Hanson, economist with Bank of America Merrill Lynch. “The Fed has entered a holding pattern while watching for signs of a substantial improvement in the labor market,” added Ellen Zentner, senior U.S. economist for Nomura Securities. At the moment, the Fed is buying $45 billion of long-term Treasurys each month under its Operation Twist program, with the purchases offset by sales of shorter-term securities. Many economists think the Fed will decide to expand QE3 by that amount, and with Treasurys instead of MBS. But the announcement is not expected to come until its December meeting. Several Fed officials have spoken in favor of expanding QE3. Read: Fed’s next move: Buy more Treasurys The proposal to abandon calendar dates from its guidance would work along the lines of a plan advocated by Charles Evans, the president of the Chicago Fed. Evans wants the Fed to tell the market that it would keep rates near zero, as long as unemployment remains above 7% and as long as inflation does not threaten to rise above 3%. The biggest monetary policy development since the last Fed meeting was that Narayana Kocherlakota, the president of the Minneapolis Fed, who also came out in support of numerical targets. In what one Fed watcher called a plot twist out of an Alfred Hitchcock movie, Kocherlakota called on the Fed to hold interest rates at zero for another four years until the unemployment rate hits 5.5%. Only a few months earlier, Kocherlakota had advocated a rate hike before the end of this year. Fed’s Kocherlakota surprises with dovish stance. Only if inflation move higher than 2.25% would the Fed need to hike rates, Kocherlakota said. Finding the right set of numbers for triggers will be a challenge for the Fed, analysts said. “I don’t know if they will ever agree,” said Hanson. Mike Moran, chief economist at Daiwa Securities America, noted that Kocherlakota and Evans are far apart on their inflation triggers. The Fed is also working on a consensus forecast of the 12 voters on the interest-rate-setting committee. At the moment, the Fed provides a summary of individual policymakers’ forecasts. A consensus forecast is the first step towards numerical targets, said Tom Porcelli, economist at RBC Capital. Depending on how much progress is made on the issue this week, a consensus forecast could be released in December, economists said. Bernanke has yet to provide any guidance of his preferred approach, noted Milan Mulraine, economist with TD Securities. http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/10/20_Why_Money_Is_Now_Pouring_Into_Hard_Assets_All_Over_The_World.html
On the heels of the latest jobs data, today Michael Pento writes about the incredible challenges that central planners face in Europe, the US, and China. Pento has been incredibly accurate regarding his predictions in these areas. He also states that “To accomplish the goal of achieving a real rate of return on investments, after taxes and inflation are considered, history proves that can only be supplied by owning hard assets.” Michael Pento writes exclusively for King World News to let readers know what to expect next. Here is Pento’s piece: “The economies of Southern Europe continue to experience extreme duress. For example, the bad loans of Spanish banks jumped to 10.5% in August, which is up 17 straight months, and has increased from just .72% at the end of 2007.” Michael Pento continues: “However, the answer provided by governments and central banks to propel the economy is to create more of the same condition that brought about the problems in the first place. That is, to increase the level of base money in the hopes of increasing the rate of broad money supply growth and inflation. But despite the fact that inflation is already growing at 2.6% in the Eurozone, Mario Draghi is still promising to do whatever it takes to dilute the Euro’s purchasing power and create more inflation.... “Official Chinese statistics show that GDP has dropped from north of 10% for all of 2010, to just 7.4% in third quarter of this year. Other measures of growth like power consumption are up just 1.5% from a year ago. Therefore, the PBOC has injected record amounts of Renminbi into money markets and has lowered the reserve requirement for banks three times in the past year. Both measures have caused China’s money supply, as measured by M2, to increase 14.8% YOY, which is the fastest pace in 15 months. In the U.S., the anemic pace of growth pervades throughout the economy. Initial jobless claims surged 46k last week, erasing the entire drop in the week prior. In addition, ninety-three S&P 500 companies reporting earnings, so far, for the third quarter have shown that profits are down 0.5%. The sad facts are that GDP and earnings growth in America is just about flat. Therefore, the Fed has already placed interest rates at zero percent for the last four years and has caused M2 money supply to be up 7% YOY. The strategy of governments and central banks is clear; lower interest rates and pump money into the system, in order to re-inflate asset prices and releverage the economy. Although they have been very successful at debasing their currencies, they have missed a very key point -- an increase in money supply growth and inflation does not equate to an improving economy. And when taken to the extreme levels we see today, it instead leads to a protracted period of persistently weakening economic growth. Money supply growth should never eclipse labor force + productivity growth. When inflation rises faster than GDP, malinvestments are created and asset bubbles form. That is especially true today as we see a tremendously-dangerous bubble being created in all the bond markets of the developed world. But what is also true is that government debt, that is being systematically monetized by central banks, is slowly destroying any confidence left in fiat currencies. As more and more credibility is lost in paper money, GDP growth will continue to decrease in real terms. As long as governments continue to produce massive annual deficits that are purchased by their central banks, the global economy will continue to stagnate and inflation will increase. What is also true, is that equity markets tend to rise over time in nominal terms because excess money supply lowers the value of currencies and raises stock prices. However, the increase in equity values seldom keeps pace with the rate of inflation. To accomplish the goal of achieving a real rate of return on investments, after taxes and inflation are considered, history proves that can only be supplied by owning hard assets.” 
http://www.reuters.com/article/2012/10/14/us-usa-fed-inflation-idUSBRE89D05420121014
(Reuters) - Will the U.S. Federal Reserve look the other way if inflation overruns its target? Risking the wrath of politicians and the central bank's hard-won reputation for keeping prices stable, three top Fed officials are touting plans for boosting employment that explicitly allow for inflation to run above the Fed's 2.0-percent goal. Investors are wondering just how high - and for how long - the Fed may allow inflation to rise to encourage borrowing, investment and hiring. In theory, more people working means higher output, which should narrow the gap between what American workers are currently producing and their potential. "The Fed's body language clearly says they think the output gap is huge and that they're willing to take risks on inflation," said Bluford Putnam, chief economist at futures exchange operator CME Group. The Fed reduced official interest rates to near zero almost four years ago and has since then bought some $2.3 trillion in securities to boost the economy, taking the central bank deeper into uncharted policy territory. With the U.S. economy still recovering only slowly, last month the Fed said it would keep buying bonds until the labor market outlook improves "substantially," a move that many investors expect will boost inflation, currently running below the 2.0 percent target. Since the announcement, the central bank's top policymakers have been busy drawing their lines in the sand. Minneapolis Fed President Narayana Kocherlakota says he would tolerate inflation of 2.25 percent, and John Williams of the San Francisco Fed says he's OK with 2.5 percent. The Chicago Fed's Charles Evans, considered one of the central bank's most pro-growth "doves," says he'd hold fast to low rates as long as the outlook for inflation stayed below 3 percent. Volatility in bond markets suggests investors are adjusting their bets as to the true intentions of Fed Chairman Ben Bernanke and his core of policymakers, and whether they will be able to control inflation when the time comes. "I wouldn't be surprised if they let it run to 3.0 percent for a quarter or two and still rationalize that by saying they still haven't seen unemployment go down like they want it to," said Mike Knebel, portfolio manager specializing in fixed income at Ferguson Wellman Capital Management in Portland, Oregon. "Three percent still seems to be a fairly reasonable number in most people's minds - at least those of us who are old enough to remember when six percent was considered the norm," he said. BERNANKE'S QUIET VICTORY Inflation soared to over 14 percent in 1980 before the Fed under then-Chairman Paul Volcker finally wrestled it back down. Albeit far less severe, the last time inflation fears gripped the United States was in 2008, just before Lehman Brothers collapsed at the height of the financial crisis. While inflation targeting has been a bedrock of central banking internationally for decades, the Fed only this year adopted an explicit target inflation but also, unlike most of its peers, is charged not only with keeping prices stable but also with maximizing employment. In August, the Fed's preferred annual measure of inflation, the Commerce Deptartment's personal consumption price index was up just 1.5 percent for the year in August, while the more broadly watched U.S. Labor Department's consumer price index increased 1.7 percent. September's reading of the consumer price index is to be published on Tuesday and is forecast to see inflation at 1.9 percent. Prices have generally stayed low and stable the last three years, representing a quiet victory for Bernanke amid fallout from the brutal recession in 2008 that threatened a period of deflation, which is the phenomenon of falling prices that held Japan in a slump for a decade. After the central bank made its bold statement last month, announcing further bond buying until unemployment falls significantly, Bernanke was at pains to say that getting more Americans back to work would not come at the cost of higher inflation. If inflation were to run above target, he told reporters, the Fed will bring it back to 2.0 percent "over time" as part of a balanced approach to achieving its two mandates of price stability and full employment. One key indicator of inflation expectations, based on the gap between regular and inflation-protected U.S. Treasury bonds, jumped to a six-year high of 2.65 percent after the Fed's decision on September 13. That so-called "breakeven" rate, which tracks expectations for inflation 10 years from now, is currently running at about 2.47 percent, according to Reuters data. WILLIAMS NOT BUYING Most people see inflation as a bad thing. Higher wages mean more money in consumers' pockets, but the price of everything they want to buy rises as well, typically too quickly for earnings to keep up. Left to rise too fast for too long, inflation also risks devaluing the currency and stanching economic growth. The fact that gold prices, which usually move opposite the U.S. dollar, remain near record highs reflects concerns about future inflation. But many influential economists believe that higher inflation expectations translate into lower "real," or inflation-adjusted, interest rates, which could stimulate the economy, an attractive selling point for a central bank running out of policy options. Not everyone is buying the idea, including Williams, the policy-centrist chief of the San Francisco Fed, who this week announced that inflation would need to rise to 2.5 percent before he would want to rethink the Fed's low-rate policy to boost jobs. "You would expect inflation to fluctuate within some kind of reasonable band, so say between 1.5 percent and 2.5 percent. Even in normal situations, inflation tends to fluctuate because of various shocks and events," Williams told Reuters on Wednesday. But acknowledging that he is not troubled by inflation of up to 2.5 percent is a far cry from purposely stoking it to bring down real interest rates, or to cut the burden of household debt, he said. Firstly, he said, the Fed does not have that kind of hair-trigger control. "The idea that you could create 4.0 percent inflation for a few years, and then bring it back to 2.0 percent, is a dream, a false dream," Williams said in his office overlooking San Francisco Bay. The risk of trying that approach and then failing, he said, is a costly recession, the likes of which the United States has not seen since the Fed ratcheted up interest rates by about 16 percentage points to battle raging inflation through the 1970s and early 1980s. But even if such precise managing of inflation were possible, higher inflation expectations may not generate the benefits that modern macroeconomic theory tends to predict, Williams noted. Instead of pushing up wages and house prices and trimming the real value of household debt burdens, higher inflation might simply create greater uncertainty, curbing investment and growth, he said. Inflation could also damage the Fed's credibility, which many cite for U.S. price stability in the first place. TRADING THE INFLATION TARGET Supporters of more easing say the Fed has no intention of turning a blind eye to inflation. "I disagree with the premise that what we're doing is seeking to gin up inflation," Jeremy Stein, the Fed's newest governor and a strong backer of the Fed's recent policy easing, said on Thursday. Intentional or not, markets appear to believe that the Fed's inflation stance has shifted, if only slightly. The brief jump in breakeven rates suggested investors are repricing the exact meaning of the central bank's inflation target, which may be warranted "if the Fed's policy stance implies a potentially somewhat higher inflation rate in coming years," said Roberto Perli, managing director of policy research at broker dealer International Strategy and Investment Group. Charles Plosser, the head of the Philadelphia Fed and an inflation hawk who opposed the recent round of easing, warned, however, that the central bank may be sending the wrong signals. Some people have interpreted the Fed's statement last month, that it won't start raising interest rates as soon as a U.S. economic recovery strengthens, to mean it is willing to tolerate higher inflation in order to lower the unemployment rate, Plosser said on Thursday. "This is another risk," he said, "to the hard-won credibility the institution has built up over many years, which, if lost, will undermine economic stability." (Reporting by Jonathan Spicer and Ann Saphir; Additional reporting by Chris Reese; Editing by Dan Grebler) |
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