Fed Thinks It Has Conjured Inflation

Tim Cavanaugh | August 12, 2009

After two days of satanic worship, no-safeword BDSM and blackface minstrel performances, the Federal Open Market Committee (FOMC) announced today that it will stay the course on currency manipulation. According to the post-meeting press release, the Federal Reserve will maintain its effective negative target range for the federal funds rate. With economic activity "leveling out," "signs of stabilizing" in household spending, "tight credit," continued business cutbacks and a "gradual resumption of sustainable economic growth in a context of price stability," the Fed expects inflation to "remain subdued for some time." But the Fed is also standing by its plan to discontinue purchases of Treasury debt this fall:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

The plan to phase out Treasury purchases is a bet that inflation will be kicking in by the fall, as Americans gear up for the harvest festival that marks their winter solstice. Will Santa be bringing you a wallet full of degenerated dollars? Some early signs: The greenback spiked right after the FOMC's announcement, but has been falling against the currencies of countries with adult supervision. Demand for the the 10-year Treasury note followed the same pattern -- with the FOMC's statement triggering a brief flurry after a disappointing auction of $23 billion in new government debt earlier in the day. Maybe the market took the boilerplate about "subdued inflation" seriously. Or maybe it's easier to believe the economy will heat up when the Fed doesn't say so.

Comments

|8.13.09 @ 12:15AM|#

Live goats were not harmed during the 2-day session, as on-site supervisors from ASPCA observed the ongoing agenda.

Unless the unemployment picture improves, and perhaps residential shows any signs of improvement / recovery...just maybe 1st qtr 2010 FED begins to raise em. I wouldn't bet money on it...not mine anyway

hmm|8.13.09 @ 12:24AM|#

I wonder how many days until they back door the monotization of debt to buy a portion of this debt back. They should probably wait a longer than last time, so what two weeks?

The Fed isn't betting on inflation they are praying for it and hoping to drive it in order to raise revenue.

The whole time they are selling debt and saying see, people want this shit. They love it. They are in the back ally going "*pssst hey you buy this shit and I will buy it back in a week or so. Okay?"

|8.13.09 @ 1:30AM|#

Clear as mud

Mike Laursen|8.13.09 @ 1:56AM|#

hmm, what does "back dooring" mean in the context of your comment?

Paul|8.13.09 @ 2:16AM|#

hmm, what does "back dooring" mean in the context of your comment?

The Fed: If you could turn around, Mr Laursen, and bend over...

Paul|8.13.09 @ 2:17AM|#

But seriously, lest we forget, this is just the continuation of the American Structured Securities Rescue Act for a Prudent Economy. More to come...

Ebeneezer Scrooge|8.13.09 @ 5:16AM|#

Live goats were not harmed during the 2-day session, as on-site supervisors from ASPCA observed the ongoing agenda.

Well that's a relief.

Ebeneezer Scrooge|8.13.09 @ 5:18AM|#

The Fed isn't betting on inflation they are praying for it and hoping to drive it in order to raise revenue.

Hoping for it, yes. But if this is right

http://www.econlib.org/library/Columns/y2009/Hummeltbills.html

they won't get as far with it as in the good old days.

Frater Perdurabo|8.13.09 @ 9:07AM|#

After two days of satanic worship, no-safeword BDSM and blackface minstrel performances, ...

Racist!

hmm|8.13.09 @ 11:16AM|#

Mike Laursen | August 13, 2009, 1:56am | #
hmm, what does "back dooring" mean in the context of your comment?>/blockquote>

They are selling debt and then turning around and printing money to buy it back. It's a backdoor method of monetizing debt. They bought back half of what they sold last week.

The process is either to drive demand for debt by monetizing some of it. The real question is does did timmy arrange for this, or is it just some freak occurrence where a few days after debt is sold the US buys it back. Considering he asked to raise the debt limit, I'm going to go with the worst and assume Timmy and Ben and someone else are working together to monetize debt through secondary market purchases. Rather than just print the money and issue yourself your own debt.

|8.13.09 @ 11:24AM|#

Considering he asked to raise the debt limit, I'm going to go with the worst and assume Timmy and Ben and someone else are working together to monetize debt through secondary market purchases.

Of course they are. The key short-term goal is to keep the market for T-Bills on life support, which requires the Fed to step in and buy up any that are left on the table. They probably have some side deals with other players to buy the bills at auction and hold them for a few weeks, so its not too blatantly obvious how rigged the auctions are and how weak the T-Bill really is.

hmm|8.13.09 @ 11:29AM|#

Fed sells bonds

Someone buys them

Fed buys bonds back

Where does the money to buy the bonds back come from?

Martenson's take

MarketWatch

Mike Laursen|8.13.09 @ 12:40PM|#

OK, I think I get what you meant by back-door. Isn't this the FOMC's front-door activity?

|8.13.09 @ 1:11PM|#

Unless the unemployment picture improves, and perhaps residential shows any signs of improvement / recovery

And don't forget, the other show hasn't dropped yet. Commercial Real Estate is going to have the same problems in the next year or two that residential is having.

|8.13.09 @ 1:45PM|#

Yes indeed...my thesis on sticking to just residential was for keeping it simpler. Which means either deflationary concerns will continue to be an issue for investors / bank portfolios...or they won't

|8.13.09 @ 3:50PM|#

What we are seeing here is a combination of asset deflation and monetary inflation. To me, that sounds like a deeply unstable situation. I can't quite figure out how it will finally resolve, but I keep thinking it will be hyperinflation, as you have a vastly increased money supply chasing a depleted pool of assets.

mark|8.13.09 @ 6:31PM|#

Sounds about right to me. Lock in those rates!

Ebeneezer Scrooge|8.13.09 @ 9:24PM|#

What we are seeing here is a combination of asset deflation and monetary inflation. To me, that sounds like a deeply unstable situation. I can't quite figure out how it will finally resolve

Let's see. Asset deflation + monetary inflation = more asset deflation. At the same time Uncle Sam is hugely motivated to provide even more monetary inflation.

Let me know when you figure this out, because I've been asking the same question for months.

Though I'm increasingly convinced the Fed doesn't benefit from inflation to near the extent they did in the '70's, that doesn't mean they won't do it anyway.

Which means that sooner or later, our bank statements are going to be using exponential notation.

|8.13.09 @ 10:12PM|#

Be long TBT (ETF that shorts ~ 20yr Treasury) and non-US equity / blended investments ??

|8.13.09 @ 10:23PM|#

That was merely a suggestive approach to balance out US equity exposure, if above-mentioned scenario comes to pass.

Secondly I will guess that the standard of living most younger (ages < 50?) US generations are grown accustomed could be in for the rudest of awakenings...think back 25-30 years ago. I sure as hell didn't grow up with a TV of my own (simplest example)...or anything close to an Ipod or cell phone. Much of that attributes to technology leaps / bounds...but not all of it.

Ebeneezer Scrooge|8.14.09 @ 4:35AM|#

Secondly I will guess that the standard of living most younger (ages < 50?) US generations are grown accustomed could be in for the rudest of awakenings

I'm afraid you're right.

|8.14.09 @ 10:19AM|#

Entitlements...the gift that'll stop giving.

Or better to quote Chris Rock: "women do not go backwards in lifestyle...never happens..you can but they aint"

magic|8.16.09 @ 6:16AM|#

thanks very sesli chat