Speaking of inflation, the minutes from the Fed’s Federal Open Market Committee (FOMC) meeting on March 15 were released last week, and it was crystal clear that the inflation “doves” remain in charge of the FOMC. In fact, the FOMC minutes discussed how the Fed “saw no need” to stop quantitative easing. They also openly discussed how the Fed might have to keep interest rates near zero well beyond 2011!
Only a minority of FOMC members discussed the possibility of raising key interest rates. The FOMC minutes dismissed these dissidents by saying that “a few participants indicated that economic conditions might warrant a move toward less accommodative monetary policy this year,” while adding that “a few others noted that exceptional policy accommodation could be appropriate beyond 2011.” The Fed seems to be ignoring any inflation threats, because they know that higher rates would increase the cost of debt service for the federal government’s $14-plus trillion deficit, thereby offsetting any potential spending cuts.
In the meantime, Fed Chairman Ben Bernanke implied that inflation is just a temporary nuisance, saying that commodity prices are being driven primarily by global supply and demand. Mr. Bernanke thinks that rising commodity prices do not represent a foretaste of accelerating inflation. Specifically, he said, “I think the increase will be transitory, that it will pass, and we will go back to a level of inflation that is consistent with our price stability mandate.” But in truth, gold and oil are not rising that much in terms of stronger currencies like the Brazilian real or Australian dollar, so commodity price inflation is not just “supply and demand,” but the sinking value of the currency in which these commodities are quoted.
The Fed Chairman also predicted a high level of foreclosures in 2011. Since the Fed is in charge of the banking system, it must remain accommodative until the banking industry cleans up its bad loans, which may take years, due to the fact that 11% of all homes in the U.S. are unoccupied. Mr. Bernanke said that he hoped foreclosures would start to fall in 2012, but until the foreclosure activity dries up, the Fed will likely remain very accommodative, since its key job is to keep the banking industry afloat!
This week, we will see the major March inflation indicators released (Producer Prices on Thursday and Consumer Prices on Friday), along with March industrial production and retail sales. It will be interesting to see how the Fed downplays any high-and-rising inflation numbers. How much longer will the Fed choose to protect our weak banks and profligate government at the expense of the once-King Dollar?