Everbank’s Chris Gaffney comments that the Fed is now out of ammo and into uncharted territory, trying to employ untested methods which are likely to lead to higher inflation.
So Chairman Bernanke has used up all of his remaining ammunition for the main weapon against the economic crisis, and now has to move to other less proven methods to combat the crisis. These ‘quantitative’ easing methods which the Fed will now use are unproven, but they are all that they have left. The Fed pulled the first new weapon out yesterday with a pledge to buy unlimited quantities of mortgage backed securities. They hope that by purchasing these securities, they will be able to force mortgage rates lower. But as Chuck points out above, it isn’t the cost of credit, but the availability that is the big problem.
The problem with these new untested financial weapons is that their longer term impacts are not known. I can assure you of one thing, the new methods suggested by the FOMC will all lead to higher inflation. Most of the press surrounding the announcement suggested that inflation is no longer a problem. And the data released yesterday supports this view, as CPI fell 1.7% MOM in November, bringing the annual change in core prices to just 2%. So US policy makers have decided to concentrate on getting the US economy growing again, with no consideration of the long term inflationary effects of their policies. The Fed is pushing the printing presses to their limit, and while oil prices have kept prices down for now, inflation is still alive, and is waiting just around the corner.
It looks like the markets have figured this out already – the dollar is being taken to the woodshed.
Thanks, Ben and Co.
Editor’s Note: If you’re interested in diversifying some of your savings, I’d recommend checking out some of Everbank’s foreign currency offerings.