Fed to Keep Calm and Carry On?

This week’s FOMC statement was anything but mind-blowing. As expected, the Fed kept interest rates at record lows and confirmed that its $600 billion bond purchases would end in June.

They also said that the U.S. economy is growing at a moderate pace and is estimated to expand by 3.1% to 3.3% this year. If you kept tabs on their March statement, you’d notice that there was a slight downward revision from their previous GDP forecast of 3.4% to 3.9% for 2011. Other than that, their April policy announcement was pretty much a replay of their previous statement, and the one before that, and the one before that…

Ben Bernanke doesn’t seem to mind that he’s starting to sound like a broken record when he repeated that interest rates will remain “exceptionally low” for an “extended period” of time. The man does stay true to his word, so I’ll give him credit for that. What bothers me is that the Fed is still in no rush to tighten its monetary policy despite the possibility of inflation spinning out of control.

What’s worse is that headline inflation is expected to peak at 2.8% this year, way above the central bank’s 2% target inflation. In fact, consumer price levels already rose by an annualized 2.7% last month, just a notch away from their 2.8% estimate. Is Bernanke so glued to the upcoming British royal wedding that he’s not seeing these alarming inflation figures?

Maybe Big Ben is still in denial. During their press conference, the Fed head stuck to the script and stayed cool as a cucumber while answering interview questions as though he didn’t want to say anything to shock the markets.

Man thinking

The Fed’s low inflation expectation for next year is perhaps the one of the main reasons why they remain resolute in sticking to their guns.

While commodity prices have been rising, Bernanke believes they are merely temporary. After inflation tops out at around 2.8% percent, it’ll eventually fall back below the 2% target by 2012. Well, at least that’s what the Fed is expecting.

In addition, the U.S. economy is expected to expand by less than 2% for the first quarter of this year. Keeping a loose monetary policy will be helpful for an economy that’s hardly growing.

But we’re not blind. How can Bernanke say that the surge in commodity prices is merely temporary when they just keep rising and rising and rising and rising and rising… Oh wait, where was I? Heck, I’m sure you’ve had your fair share of complaints regarding high gas prices!

Is it possible that the Fed has a hidden agenda? Is the Fed purposefully keeping the dollar low through bearish statements to encourage inflation?

After all, there’s a clear disconnect between what Bernanke has been saying and what is happening in the markets. The Fed has been pushing for a strong and stable Greenback, yet the currency has been making lows against currencies like the Aussie, the Swissy, and the Loonie.

I’m not a fan of conspiracy theories but it is a possibility, especially since the Fed has been so aggressive in stimulating the economy with very little regard for future inflation. They have brought down rates under 0.25% and implemented QE1 and QE2.

Whether the Fed has a hidden agenda or not, it seems that they’ll continue to sit on their hands until the economy shows clear signs of improving. With that said, expect U.S. interest rates to be very, very low for very, very long…

3 comments

  1. Olli

    Of course they have a hidden plan!
    Samy Molcho said once: A woman shouldn´t listen to what a man is saying. A woman should look, what he is actually doing for her.

    So, we shouldn´t listen to, what Ben is saying. We should have a closer look at what he is actually doing. And that ist pretty obviously.

    Reply
  2. Dean FX Paul

    One thing is for sure, if they keep sitting on their hands, the US dollar and economy will be increasingly worth dirt.

    Reply
  3. JDM

    If prices rise like there’s inflation and the value of the currency drops like there’s inflation it probably is inflation.

    Reply

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