Posted by WARREN MOSLER on June 22nd, 2011
First, the Chairman’s comments along the lines of ‘addressing our long term deficit problem will lower the risk of interest rates spiking’ yet again clearly demonstrated our Fed Chairman remains lost in some kind of fixed exchange rate paradigm, and is steering things accordingly, both directly with Fed policy and indirectly with his advice to Congress, all of which continues to work to keep the output gap as high as it is.
Anyway, here’s my take on what’s happening, as per the Chairman:
Things have changed since QE2.
Job growth has increased, and unemployment is forecast to come down over time.
And inflation indicators have bottomed and turned up some, perhaps a bit too high short term, but are forecast to come back down to desired levels, given, as always assumed in Fed forecasts, appropriate monetary policy. And right now appropriate monetary policy means no more qe.
in other words, the room for further ‘monetary stimulus’ isn’t there.
it might interfere with the hoped for transient nature of recent cpi increases and not allow the cpi to come back in line with desired levels
that is, the Fed doesn’t see the risk/reward suggesting pushing any harder.
Which is exactly what China wanted to hear, but that’s another story.
Lastly, it was again stated the Fed hasn’t run out of bullets (as if it ever had any bullets), yet open options mentioned didn’t seem at all meaningful. And the Chairman maintained that because inflation is a monetary phenomena the Fed can always create inflation. Nice slogan, but talk is cheap, and so far the only inflation they’ve created is that of scaring portfolio managers out the dollar, which works until they cover their shorts in the broad sense, and that transitory inflation, as the Fed calls it, reverses.
None of this bodes well for aggregate demand.
My macro view remains the same-
because we fear becoming the next Greece, we continue to work turn ourselves into the next Japan.