So, Bernanke has given markets what they need to hear. First, it’s damn the lifeboats on commodities inflation:
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
Next, it’s whatever you want, whenever you need it:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.
Now, don’t get me wrong, I have some sympathy with the US position. Since the GFC, which began the reckoning of the global imbalances (which were in part caused by loose US monetary policy), the US has faced an intractable problem in its trade deficit with China because the latter won’t budge on its currency, when it damn well should. In this context I can accept the justification for loose monetary policy to a degree.
But, let’s get over this silly idea that it isn’t inflationary. And secondly that “inflation expectations” are in any way an adequate tool for us to draw this conclusion.
Inflation expectations surveys are of consumers. They are therefore a measure of some combination of labour and consumer items inflation expectations.
But today’s inflation is not in labour or household items. It is in financial assets. Excess liquidity these days doesn’t suddenly appear in product prices and wage claims. It appears in securities markets and, until the irresistible warning of the GFC, housing markets.
In other words, inflation expectations are now operative in capital not labour markets.
I know some will argue that the FOMC watches Treasury markets for inflation expectations in capital. But how reliable is that when the market is dominated by the purchases of foreign governments whose goals are national interest not market related, as well as the FOMC itself? Members of the FOMC have themselves acknowledged the uselessnes of the measure.
The inflation of capital is important because it is one half of the new boom and bust growth cycle that has taken over the global economy (the flip side being the real and perceived shortages in various hard assets, that is, commodities).
If you want to get a gauge of future inflation, you need to be surveying the expectations of capital market traders, not labour market consumers. And if you did your survey after today’s FOMC meeting, expectations would be very high indeed.
Bernanke’s new bubble just inflated a little more.
