The Fed’s mandate is to do two things: Promote Maximum Employment AND Promote Stable Prices. They have to fight inflation (less dollars in the system) while trying to make sure there is enough credit in the market so that businesses can borrow at low interest rates to expand and operate to create jobs.
Inflation (too much money in the system) versus employment (cheap credit=more money in the system). The Fed’s only tool is money supply.
So, here is what to expect from the Fed:
Bernanke Faces Possible Fed Split on Maintaining Stimulus
Federal Reserve Chairman Ben S. Bernanke may have to overcome divisions among policy makers should he seek to maintain record stimulus past June, minutes of the Fed’s March 15 meeting indicate.
A “few” among the central bank’s 17 governors and regional bank presidents said tighter credit may be warranted this year, while a “few others noted that exceptional policy accommodation could be appropriate beyond 2011,” the Federal Open Market Committee said in the minutes, released yesterday in Washington.
Stocks and Treasuries fell on speculation the Fed may start to tighten policy sooner than previously forecast after it completes its $600 billion bond-purchase program in June…
“You’ve got lower-than-desired growth and the potential for higher-than-desired inflation here, and it definitely complicates the picture from a policy standpoint,” said Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $197 billion.
Several FOMC members “indicated, in light of recent developments, that the risks to their forecasts of inflation had shifted somewhat to the upside,” the minutes said.
Inflation Readings
Since the March FOMC meeting, reports showed the labor market and inflation have picked up while consumer confidence slipped and new home sales dropped to a record low. Some regional Fed presidents who were skeptical of stimulus have talked about the need to tighten credit, and Bernanke has yet to indicate his preference for the Fed’s next move.
Even with the division, Bernanke and his top deputies, Vice Chairman Janet Yellen and New York Fed President William Dudley, are unlikely to favor tighter policy this year, Hembre said. “They’re the leadership,” Hembre said. “They’ll dominate the debate and they’ll win.”
While the decision last month to continue the bond purchases was unanimous, the Fed said a few of the 10 voting members of the committee thought evidence of a stronger recovery, higher inflation and rising inflation expectations “could make it appropriate to reduce the pace or overall size of the purchase program,” the minutes said. “Several others” said they “did not anticipate making adjustments.”
Yield Climbs
U.S. stocks erased gains following the release of the minutes. The Standard & Poor’s 500 Index was little changed at 1,332.63 at the close of trading in New York after rising as much as 0.4 percent before the Fed report. The yield on the 10- year Treasury note climbed to 3.48 percent from 3.42 percent the day before.
In releases since the Fed meeting, the Commerce Department reported that the central bank’s preferred price measure, which excludes food and fuel, was up 0.9 percent from a year earlier in February, the most since October. Including all items, prices rose 1.6 percent, compared with a 1.2 percent 12- month increase through January, the biggest monthly increase since December 2009.
Several FOMC members “indicated, in light of recent developments, that the risks to their forecasts of inflation had shifted somewhat to the upside,” according to the minutes. Bernanke said on April 4 in Stone Mountain, Georgia that policy makers must watch inflation “extremely closely” for evidence that rising commodity costs are having more than a temporary impact on consumer prices.
‘Abrupt Change’
“I don’t think we’re going to get a fast or abrupt change in policy,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, on Bloomberg Radio’s “The Hays Advantage.”
“But clearly the center of gravity, I think, is starting to slowly but surely shift to a more hawkish bent as the inflation data start to pick up a little bit,” said Stanley, a former Fed researcher, using a term for Fed officials who are more inclined to tighten credit to fight price increases.
The Fed’s reluctance to tighten contrasts with some of its counterparts. European Central Bank policy makers have signaled that they may raise their benchmark interest rate from a record low of 1 percent when they next meet April 7, while China raised borrowing costs yesterday for the fourth time since the global financial crisis to limit the risk of asset price bubbles in the world’s fastest-growing major economy.
‘Moderate Pace’
Fed staff economists at the meeting gave a forecast for a “moderate pace” of 2011 and 2012 growth similar to projections at the last session in January, while lowering their forecast for the unemployment rate. Even so, “the jobless rate was still expected to decline slowly and to remain elevated at the end of 2012,” the minutes said.
Hembre said he reduced his U.S. growth forecast for 2011 yesterday to 2.5 percent from 3 percent, and for the first quarter to 3 percent from 3.5 percent, because “it looks like a fairly weak quarter for domestic demand in spite of the fact that we had a payroll tax cut in the first quarter that boosted disposable income.”
“You’ve got lower-than-desired growth and the potential for higher-than-desired inflation here, and it definitely complicates the picture from a policy standpoint,” said Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $197 billion.
Low growth coupled with inflation…throw in $4 gas and we just might be headed for it…Stagflation.
Normally, low growth and an enemic economy would have no threat of inflation, except now, we have high oil that makes everything more expensive AND we have entirely too many dollars in the system…both produce inflation. High oil makes transportation and manufacturing costs higher = inflation. Combine that with too many dollars multiplied by the velocity of money that will go higher as GDP rises (economy improves even slightly) and we have unstoppable inflation. It would be easier if the economy was booming, then the Fed could raise interest rates and slow everything down or if the4re werent supply side shocks and too much money in the system the Fed could lower rates to get the place running again. This isn’t an option, interest rates are at ZERO for all intents and purposes and businesses are afraid to expand because of the cost of new employees.
There is no short term fix for this. Regulation and taxation has to become more Employment Friendly (notice I didn’t say ‘business friendly’ see it’s all how you word it, like Pro-Choice instead of Pro-Abortion) and the government (and that means every0ne) has to reign in the economy and cut cut cut to get the debt and deficit eliminated or at least back to a level where it is not destroying the economy for all of us. That means tough cuts for everyone.
Tags: Federal Reserve, US Economy
