Most of the inflation arguments touted about in the press center around the Federal Reserve’s unlimited ability to create money. And while the Fed may be a relatively sovereign entity (probably scarily so!) – it is still accountable to Congress, and ultimately the American public.
The Fed can only print as much money as the public will allows – and it appears that Fed officials are becoming aware of this fact.
The Wall Street Journal reported today that the August 10 Federal Reserve meeting was “among the most contentious in Ben Bernanke’s four-and-a-half year tenure as central bank chairman.”
At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.
The dissension is very interesting, because after the move was announced, we laughed at it!
Net-net the Fed is worried about deflation, but I think this announcement is still quite conservative. The Fed’s balance sheet, while bloated, will remain at the same level. So this would not be net-inflationary. They are just not pulling money out of the system.
And Mr. Market agreed – here’s our market wrap from August 11 – the day after the Fed meeting:
Today the Deflation Bird digested and ultimately pooped on the lame FOMC statement issued yesterday. It will take more than that, says our feathered friend, to stave off the ravages of deflation.
It was one of those now “all to common” breathtaking days on Wall Street where everything gets slammed, except for the US Dollar and Treasuries. So to everyone who’s looking for a place to invest during these waves of deflation, repeat after me: CASH!
In summary, the Fed, already largely powerless to battle the deflationary headwinds whipping into its face, is now also a house divided. It’s hard to see Helicopter Ben being allowed to swing into action – the public will tar and feather him out of town before he can rev up the engines!
Furthermore, there is growing momentum to audit the Fed – led by libertarian Ron Paul. But why now? Ron’s been calling for an audit of the Fed for 30 years!
I think he’s gaining traction now because the social mood has turned against the Fed. Bernanke & Co are behind the 8-ball in a couple of ways. First, they are already behind the curve in terms of battling deflation. And now, their hands are slowly being tied by the public – which may be tying the rope in the shape of a noose!
Related reading: M1 Money Multiplier is Still in the Tank (Hence, Deflation Still Rules)