The Federal Reserve embarked on QE ‘infinity’ earlier this year.
That was when it committed to keep printing a set amount of money each month until unemployment fell to a level it was comfortable with.
It announced – let’s call it QE ‘infinity and beyond’. Fed chief ‘Buzz’ Bernanke is taking experimental monetary policy to a whole new level.
Not only will the Fed keep printing more money for now. It’s also written itself a licence to print whatever it takes to get the US economy growing strongly again. In short, you shouldn’t expect US rates to rise again until inflation has gone beyond the point of being a clear and present danger.
The market had been pricing in at least some sort of action from the Fed. So stocks in the US, for example, ended up flat as investors fretted over the fiscal cliff.
The Fed declared it would print an extra $45bn a month to buy Treasury bonds (US government debt). This replaces the existing ‘Operation Twist’ program that’s about to end.
That’s on top of the $40bn a month in mortgage-backed bonds it began buying in September. So the Fed is now printing $85bn a month.
That was all expected. But the Fed went even further.
[The] Bank of England has an explicit inflation target. We all know by now that it couldn’t give two hoots about this target. But in theory, it’s meant to keep the consumer price index (CPI) rising at a rate of about 2% a year.
The Fed has never had any such explicit target. There was always a vague notion that it would keep inflation at a similar 2% level, but nothing set in stone.
Until now, that is.
The Fed has said it’ll keep the main US rate (the Federal Funds rate) at between 0% and 0.25% until and unless one of two things happens.
Either unemployment has to fall to 6.5% or lower. Or inflation ‘between one and two years ahead’ has to be projected to be no more than 2.5%. The Fed doesn’t expect either of these things to happen until 2015.
This is a pretty big move. For one thing, that’s a very loose inflation target. It’s a full half-percentage point above the Fed’s ‘longer-run’ goal of 2%. It’s also based on ‘projections’. We all know how little projections are worth.
You can project whatever you want to project. Mervyn King constantly justifies the Bank of England’s lack of action on inflation using those wonderful fan charts that cover just about every eventuality, yet always seem to have the Bank being bang on target within two years’ time.
So the Fed is setting an official inflation target that gives it an awful lot of leeway for ignoring inflation as long as it can pretend that it’s ‘temporary’.
Meanwhile, it’s also given itself a licence to print more money at any point that the employment rate looks like faltering. As long as the jobless rate is sitting at above 6.5%, the Fed can justify any amount of money printing it wants. All it needs to do is to say that employment isn’t growing fast enough for its liking.
What does this all mean? It means the Fed is fully committed to doing whatever it takes to get the US economy going again. QE isn’t an emergency measure anymore. It’s standard monetary policy as far as the Fed is concerned. If the economy isn’t chugging away fast enough, pump a bit more money into the tank.
This attitude makes it even more likely that it’ll do something stupid and let inflation get out of control. The Fed will be so scared of derailing any recovery, that it won’t react quickly enough to tackle inflation when it arises.
James Ferguson – who in the past rightly argued that the initial bouts of QE would not lead to rampant inflation – wrote earlier this year about why he thinks the Fed is now on dangerous ground with QE.
With the economy no longer on the brink of a deflationary collapse, there’s a serious risk that QE could be highly inflationary. Yet now the Fed is doing even more of the same.
In any case, what does this mean for your money? Well, you should hang on to gold. It’s the best way to insure yourself against a potential currency catastrophe.
John Stepek
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek
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