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Fed Faces Tough Decision On What To Say About Inflation

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Fed Is Facing Tough Decision On What to Say About Inflation

By: Reuters | 22 Jun 2009

Federal Reserve Chairman Ben Bernanke must find a convincing way to explain why his central bank is in no hurry to raise interest rates even though the economy is stabilizing.

With mounting evidence that the recession is loosening its grip on the economy—even if a healthy recovery is far from assured—investor focus is shifting to inflation.

The Fed thinks that with unemployment at a 26-year peak and idle factory space at its highest on record, there is little near-term risk of prices overheating. That gives the central bank cover to keep borrowing costs low until it deems the economy strong enough to handle a rate hike.

But for some investors, it is not so clear cut.

While there may be plenty of slack now, they worry that because the Fed and its counterparts around the world have been printing money to short-circuit the credit crisis, inflation is the inevitable consequence.

This puts Bernanke and his policy-setting team in a tricky position as they convene for a two-day meeting beginning on Tuesday.

They will need to downplay inflation now, but reassure investors that they are willing and able to withdraw the flood of money before it causes trouble.

Dino Kos, managing director at the research firm Portales Partners and a former top Fed official, said as long as the weak economy chills demand for credit, the free-flowing central bank cash poses no inflation threat.

But the Fed will have to time its exit strategy just right.

"If this is kindling right now, there is no spark to get it going," he said, adding that the Fed must be vigilant because "there's some sparks that are getting closer."

Economists polled by Reuters see no chance that the Fed will raise its benchmark short-term interest rate from the current level near zero at this week's meeting.

That said, the central bank will probably want to nurture hopes that the end of the recession is nearing.

The Fed may use its closely watched statement at the end of the meeting Wednesday to convey the message that while the economy appears set to resume growth over the next few months, interest rates will stay low for a while, said Dean Maki, an economist with Barclays Capital in New York.

Indeed, economists advising the American Bankers Association said last week that there may be four consecutive quarters of positive U.S. economic growth before the Fed is ready to budge, probably in the third quarter of 2010.

Before the Fed is ready to raise interest rates, it will probably take a sharp knife to the $2 trillion balance sheet it built up by buying assets to try to spur the economy.

The Fed has committed to buy up to $1.75 trillion of U.S. government and mortgage-linked debt, and still has a long way to go. However, it looks unlikely the Fed will decide this week to ramp up those purchases, something that had been a hot topic just a couple of weeks ago.

Many economists now think such a step could backfire if investors see it as more fuel for the inflationary fire.

Goldman Sachs economist Jan Hatzius said there was so much disagreement among investors about the path of inflation that he has heard forecasts ranging from Japan-style deflation to hyperinflation.

His personal view is similar to the Fed's—there is enough slack in the economy to ward off inflation.

Those who see inflation looming on the horizon point to the research of legendary Nobel prize-winning economist Milton Friedman, who argued that inflation is always and everywhere a monetary phenomenon.

"Persistently creating too much money chasing too few goods will, over time, push up inflation, as Milton Friedman taught us long ago," said Morgan Stanley's Richard Berner.

He thinks the risk of inflation is still far off, but the Fed will need to tighten monetary policy next year in order to prevent inflation from rising in 2011.

How quickly inflation builds depends on how quickly factories get back to full speed and the job market recovers, as well as whether the Fed can swiftly scale back lending programs and rate cuts.

Researchers at the Federal Reserve Bank of San Francisco published a paper this month questioning whether there was really as much slack in the economy as it appeared.

At issue is the output gap—the difference between what the economy is currently producing and its full potential. The Congressional Budget Office thinks the gap is bigger than 6 percent, one of the highest readings on record.

The San Francisco researchers pointed out that inflation has not fallen as far as might be expected if the output gap were really as large as the CBO estimates.

If that is true, the threat of inflation may be nearer than expected. That may explain why some Fed officials are already warning about the threat.

"We have put an enormous amount of liquidity into the system," Kansas City Federal Reserve Bank President Thomas Hoenig told CNBC in an interview on Friday. Click here for story.

"If it is allowed to remain indefinitely, and we keep a very low (interest) rate for an extended period of time, then we do risk an inflationary outbreak," he said.

http://www.cnbc.com/id/31488615

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"We have put an enormous amount of liquidity into the system," Kansas City Federal Reserve Bank President Thomas Hoenig told CNBC in an interview on Friday.

Right. How does he explain this then?

http://www.tickerforum.org/cgi-ticker/akcs-www?post=99639

Karl Denninger also caught the Fed draining liquidity at the very same time we were being told it was a liquidity crisis in September last year.

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If I was Bernanke, I would point over the journalists' heads and shout: "Look over there!".

Then I would run out the back.

Actually, I think he wants to keep his job, and the pressure's on... running away not an option ;)

Bernanke Prepares to Defend Record as Debate Over His Reappointment Begins

http://www.bloomberg.com/apps/news?pid=206...id=aUBTI6OxeEVA

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While there may be plenty of slack now, they worry that because the Fed and its counterparts around the world have been printing money to short-circuit the credit crisis, inflation is the inevitable consequence.

World is so fooked up these days they mess up price increases/decreases with inflation/deflation...

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If I was Bernanke, I would point over the journalists' heads and shout: "Look over there!".

Then I would run out the back.

:lol:

"Where's the recovery?" "

It's behind you".

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Bernanke has a problem if he claims inflation isn't a problem and gets out of control US citizens may decide to sue the Fed.

If he raises interest rates this creates another dilemma as it will trigger off another collapse of the debt bubble with the option ARM resets defaulting, this may happen anyway but low rates are designed to stop this from happening.

The Fed is in catch 22 because of it's own stupidity by allowing the asset bubble to get out of hand, however to admit the problem also means they have failed meaning Bernanke gets fired.

It appears no matter what Bernanke does he's likely to get fired at some point for failure.

There is no easy option, there is no quick fix.

The Fed has been the orchestrator of it's own demise.

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Bernanke has a problem if he claims inflation isn't a problem and gets out of control US citizens may decide to sue the Fed.

If he raises interest rates this creates another dilemma as it will trigger off another collapse of the debt bubble with the option ARM resets defaulting, this may happen anyway but low rates are designed to stop this from happening.

The Fed is in catch 22 because of it's own stupidity by allowing the asset bubble to get out of hand, however to admit the problem also means they have failed meaning Bernanke gets fired.

It appears no matter what Bernanke does he's likely to get fired at some point for failure.

There is no easy option, there is no quick fix.

The Fed has been the orchestrator of it's own demise.

They will all lie about inflation to prevent interest rates rising, and /or a bond market collapse.

This is an immediate catastrophic threat. The idea a few yanks might sue them after the fact is irrelevant.

100% gauranteed.

Nick

Edited by SurgeonGeneral

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The US needs high inflation the UK needs high inflation.

Inflation is just sovereign debt default without saying 'we will/cannot pay........'

The future is high inflation because all the powerful VI's need it to be so, therefore it will be so.

The searching for the plausible excuse to keep up printing and interest rates at these ridiculously low levels continues................The longer they can get away with it the closer they get to their ultimate aim.

The UK has still not made it's CPI target and with oil now going up along with other commodities inflationary pressure is growing, but have we seen a rate increase?

Next the UK government will revert back to RPI, I bet now it will come out of the recommendation's in September from the FSA, they will argue that by not including house hold costs it contributed to the bubble (which was one of the contributing factors) government adopts, RPI used for wage negs, interest rates begin to rise, RPI increases, peoples wages increase and the spiral out of this will begin.

Hedonics is a fecking joke, just another tool in the VI's arsenal.

I am not defending this, it is fecking sickening.

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They will all lie about inflation to prevent interest rates rising, and /or a bond market collapse.

This is an immediate catastrophic threat. The idea a few yanks might sue them after the fact is irrelevant.

100% gauranteed.

Nick

They cannot lie about it, they have screwed the semantics a bit: inflation = artificial increase in the money supply and they are loudly confirming it. Whether it results in price increases if not hyper"inflation" in the short run when a huge credit bubble bursts and velocity of money circulation reduces drastically is a different matter.

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The future is high inflation because all the powerful VI's need it to be so, therefore it will be so.

Can you please mentione these powerful VI's?

My honest hope is that things will change when the going gets very tough. True capitalists holding capital, not debts, have a lot to lose and a lot to offer in stark contrast to Mr Brown or Obama who will have to steal and expropriate more and more recklessly and visibly to sustain their cause. In fact, not only capital holders will resist, but also many sheeple will see that all that printing/additional debts are not exactly increasing productivity or welfare and reaching the common men. Instead, they will smell more and more taxes and bigger impoverishment.

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Can you please mentione these powerful VI's?

My honest hope is that things will change when the going gets very tough. True capitalists holding capital, not debts, have a lot to lose and a lot to offer in stark contrast to Mr Brown or Obama who will have to steal and expropriate more and more recklessly and visibly to sustain their cause. In fact, not only capital holders will resist, but also many sheeple will see that all that printing/additional debts are not exactly increasing productivity or welfare and reaching the common men. Instead, they will smell more and more taxes and bigger impoverishment.

You have to much faith in sheeple, for the sheeple to get pissed by it they need to understand it, most sheeple don't understand inflation, most sheeple do not understand how the calcualtion is manipulated. Sheeple will be fed on their diet of lies, then conclude that whilst life is not what it could be there is nothing we can do because it 'started in America.....' and 'it's global'.

The VI's are the governments, captilists may hold the capital, the governments hold the trigger.

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You have to much faith in sheeple, for the sheeple to get pissed by it they need to understand it, most sheeple don't understand inflation, most sheeple do not understand how the calcualtion is manipulated. Sheeple will be fed on their diet of lies, then conclude that whilst life is not what it could be there is nothing we can do because it 'started in America.....' and 'it's global'.

The VI's are the governments, captilists may hold the capital, the governments hold the trigger.

MOP posted a curious synopsis yesterday by some think-tank. And in the footnotes you could find the following:

US Treasury’s Secretary of State, Timothy Geithner, recently suffered a very embarrassing experience whilst giving a speech in front of Beijing University students: his audience simply burst into laughter when he reassured that the Chinese government had made the right choice investing their holdings in US T-Bonds and Dollars (source: Examiner/Reuters, 6/02/2009)!

I share you concerns about governments, but they neither have THE money, nor are planted by the God. Not so sure that when the fan will be hitting the sh1t again, people will ask for even more trouble, i.e. so easily approve another futile attempt to treat consequences, not the causes of the problem. There is some evidence already that once people fully understand they will be saddled with even more debt that does not benefit them and, in fact, increases their future tax liabilities, they become very uncomfortable. The unknown is how each specific government reacts in these situations: more lies or more honesty? More lies mean more controls and loss of freedom. Honesty - making hard and market friendly decisions that are most beneficial in the long term.

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They will all lie about inflation to prevent interest rates rising, and /or a bond market collapse.

This is an immediate catastrophic threat. The idea a few yanks might sue them after the fact is irrelevant.

100% gauranteed.

Nick

Being sued is the best option for them, the worst case scenario involves the people coming after them with guns.

Would you want to play this game of chicken?

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Being sued is the best option for them, the worst case scenario involves the people coming after them with guns.

Would you want to play this game of chicken?

No.

Lies piled on lies that got bigger and bigger.

Now there is everything to play for.

Nick

Edited by SurgeonGeneral

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No.

Lies piled on lies that got bigger and bigger.

Now there is everything to play for.

Nick

But the lies will soon expose the lies.

That's the problem.

You also have the problem of reality which no amount of lying can protect you from.

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