Tag Archives: Inflation

Italian article this am

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Misrepresents what I say a bit, but they do have my picture next to JFK!
;)

The IMF: sovereign currency, no longer the monopoly of the banks

Eliminate the public debt of the United States at once, and do the same with Great Britain, Italy, Germany, Japan, Greece. At the same time revive the ‘ economy, stabilize prices and oust the bankers. In a clean and painless, and faster than what you can imagine. With a magic wand? No. With a simple law, but able to replace the current system, in which to create money out of nothing are private banks. We only need a measure requiring the banks to hold a financial reserve real, 100%. To propose two economists at the International Monetary Fund, Jaromir Bene and Michael Kumhof. You, the bank, you want to make money on the loan of money? First you have to prove it really that much money. Too easy to have it by the central bank (which the factory from scratch) and then “extort” families, businesses and entire states, imposing exorbitant interest.

The study of two economists, “The Chicago Plan Revisited,” with “a revolutionary and” scandalous “‘Maria Grazia Bruzzone,” La Stampa “, emphasizes the global resonance of the dossier, that bursts like a bomb on the world capitalist system now jammed. The global debt came the exorbitant sum of 200 trillion, that is 200 trillion dollars, while the world GDP is less than 70 trillion. Translated: the world debt is 300% of gross domestic product of the entire planet. “And to hold this huge mountain of debt – which continues to grow – there are more advanced economies and developing countries,” says the Bruzzone, stressing that “the heart of the problem and the cross” is the highest “power” Japan, Europe and the United States. Hence the sortie “heretical” by Bene and Kumhof: simply write off the debt, it disappears.Sparked the debate was the last IMF report, which points the finger on austerity policies aimed at reducing thepublic debt . Policies that “could lead to recession in the economies ‘, since’ cuts and tax increases depress the ‘economy ‘.

Not only. The IMF would be really worried the crisis that is ravaging the ‘ Europe threatens to be worse than the 2008 financial. The surprise is that even the IMF now thinks that “austerity can be used to justify the privatization of public services,” with consequences “potentially disastrous”. But if the problem is the debt – public, but now “privatized” by finance – you can not delete? Solution already ventilated by the Bank of England, which holds 25% of the British sovereign debt: the Bank of England may reset it by clicking on the computer. Advantages: “You will pay much less interest, it would free up cash and you could make less harsh austerity.” The debate rages on many media, starting from the same “Financial Times”. thread which breaks now the revolutionary proposal of the two IMF economists targati: cancel the debt.

“The Chicago Plan Revisited,” writes Maria Grazia Bruzzone, raises and explores the “Chicago Plan” original, drawn up in the middle of the Great Depression of the ’30s by two other economists, Irving Fisher, Henry Simons of the University of Chicago, the cradle of liberalism . Cancel 100% of the debt? “The trick is to replace our system, where money is created by private banks – for 95-97% of the supply of money – money created by the state. It would mean return to the historical norm, before the English King Charles II put in private hands control of the money available, “back in 1666. It would mean a frontal assault on the “fractional reserve” banking, accused of seigniorage on the issue of currency speculation: if lenders are instead forced to hold 100% of its reserves to guarantee deposits and loans, “pardon the exorbitant privilege of create money out of nothing. ” As a result: “The nation regained control over the availability of money,” and also “reduces the pernicious cycles of expansion and contraction of credit.”

The authors of the first “Plan of Chicago” had thought that the cycles of expansion and contraction of credit lead to an unhealthy concentration of wealth: “They had seen in the early thirties creditors seize farmers effectively bankrupt, grab their lands or comprarsele for a piece of bread. ” Today, the authors of the new edition of this plan argue that the “trauma” of the credit cycle that expands and contracts – caused by private money creation – is a historical fact that is already outlined with Jubilees Debt ancient Mesopotamia, as well as in ancient Greece and even Rome. Sovereign control (the state or the Pope) on currency, recalls Bruzzone, Britain remained so throughout the Middle Ages, until 1666, when it began the era of the cycles of expansion and contraction. With the “bank privatization” of money, add the “Telegraph”, “opened the way for the agricultural revolution, and after the industrial revolution and the biggest leap Economic ever seen “- but it is not the case of” quibbling, “quips the newspaper.

According to the young economists of the IMF, is just a myth – disclosed “innocently” by Adam Smith – that the money has been developed as a medium of exchange based on gold, or related to it. Just as it is a myth, the study points out the IMF, what you learn from books: that is the Fed, the U.S. central bank, to control the creation of the dollar. “In fact, money is created by private banks to 95-97% through loans.” Private banks, in fact, do not lend as owners of cash deposits, the process is exactly the opposite. “Every time a bank makes a loan, the computer writes the loan (plus interest) and the corresponding liability in its balance sheet. But the money that pays the bank has a small part. If it does borrow from another bank, or by the central bank. And the central bank, in turn, creates out of nothing that lends the money to the bank. ”

In the current system, in fact, the bank is not required to have its own reserves – except for a tiny fraction of what it provides. Under a system of “fractional reserve”, each money created out of nothing is a debt equivalent: “Which produces an exponential increase in the debt, to the point that the system collapses on itself.” The economists of the IMF hours overturn the situation. The key is the clear distinction between the amount of money and the amount of credit between money creation and lending. If you impose banks to lend only numbers covered by actual reserves, loans would be fully funded from reserves or profits accrued. At that point, the banks can no longer create new money out of thin air. Generate profits through loans – without actually having a cash reserve – is “an extraordinary and exclusive privilege, denied to other business.”

“The banks – says Maria Grazia Bruzzone – would become what he mistakenly believed to be, pure intermediaries who have to get out their funds to be able to make loans.” In this way, the U.S. Federal Reserve “is approprierebbe for the first time the control over the availability of money, making it easier to manage inflation.” In fact, it is observed that the central bank would be nationalized, becoming a branch of the Treasury, and now the Fed is still owned by private banks. “Nationalizing” the Fed, the huge national debt would turn into a surplus, and the private banks’ should borrow reserves to offset possible liabilities. ” Already wanted to do John Fitzgerald Kennedy, who began to print – at no cost – “dollars of the Treasury,” against those “private” by the Fed, but the challenge of JFK died tragically, as we know, under the blows of the killer of Dallas , quickly stored from “amnesia” of powerful debunking.

Sovereign coin, issued directly by the government, the state would no longer be “liable”, but it would become a “creditor”, able to buy private debt, which would also be easily deleted. After decades, back on the field the ghost of Kennedy. In short: even the economists of the IMF hours espouse the theory of Warren Mosler, who are fighting for their monetary sovereignty as a trump card to go out – once and for all – from financial slavery subjecting entire populations, crushed by the crisis , the hegemonic power of a very small elite of “rentiers”, while the ‘ economic reality – with services cut and the credit granted in dribs and drabs – simply go to hell. And ‘the cardinal assumption of Modern Money Theory supported in Italy by Paul Barnard: if to emit “money created out of nothing” is the state, instead of banks, collapsing the blackmail of austerity that impoverishes all, immeasurably enriching only parasites of finance . With currency sovereign government can create jobs at low cost. That is, welfare, income and hope for millions of people, with a guaranteed recovery of consumption. Pure oxygen ‘s economy . Not surprisingly, adds Bruzzone, if already the original “Chicago Plan”, as approved by committees of the U.S. Congress, never became law, despite the fact that they were caldeggiarlo well 235 academic economists, including Milton Friedman and English liberal James Tobin, the father of the “Tobin tax”. In practice, “the plan died because of the strong resistance of the banking sector.” These are the same banks, the journalist adds the “Print”, which today recalcitrano ahead to reserve requirements a bit ‘higher (but still of the order of 4-6%) required by the Basel III rules, however, insufficient to do deterrent in the event of a newcrisis . Banks: “The same who spend billions on lobbying and campaign contributions to presidential candidates. And in front of the new “Chicago Plan” threaten havoc and that “it would mean changing the nature of western capitalism. ‘” That may be true, admits Bruzzone: “Maybe but it would be a better capitalism. And less risky. ”

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China News

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Reads to me like policy is moving back towards growth and ‘inflation?’

I don’t expect runaway inflation but enough to continue to fundamentally continue to weaken the currency.

China’s currency has been fundamentally weakened for the last couple of years, while being supported vs the dollar by foreign investment, speculation, and what looks to me like the indirect expenditure of dollar reserves. Should the currency starts falling against the dollar it will tell me those factors have run their course.

Hu Pledges More China Imports as IMF’s Zhu Sees ‘Soft Landing’
China’s Stocks Rise Most in 3 Weeks on Bank Loans, CPI Outlook
China’s Hu pushes for larger global role
Obama warns Hu of U.S. frustrations on trade
Major yuan rise no cure for U.S. economic ills-China’s Hu
China’s Imports Rise Sharply, While Export Growth Slows
China New Loans Rise More Than Expected in Loosening Signal
Former China Banking Regulator Says China 2011 Growth Above 9%
China’s economy on right track: IMF
IMF See Little Decrease in Incentives for Saving in China
Former PBOC Adviser: China’s Economy May Grow 8%-8.5% Annually Over Next 10 Years – Report
China’s Property Market Experiencing ‘Soft Landing’, Fan Says

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It must be impossible for the Fed to create inflation

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Hardly an hour goes by without some pundit pushing the possibility of some kind of run away inflation, with Zimbabwe and Weimar rolling off the tongues of ordinary Americans everywhere. And Congressman and candidates of all persuasions continuously lambaste the Fed for debasing the currency.

There’s no question the Fed has been trying to reflate, particularly with regard to housing. They were not going to make the mistake Japan made, so they rapidly dropped the fed funds rate to near 0%, provided unlimited bank liquidity, and then went on to buy $trillions of US government securities in an attempt to support demand and prices by adding more liquidity and further bringing down long term interest rates and mortgages. The stated and obvious intent has been to do everything they can to support a private sector credit expansion that would support prices and the aggregate demand needed to reduce unemployment.

For all practical purposes the Fed has done it all. And yet unemployment remains at depression levels of over 9% (and over 16% the way it used to be calculated not long ago) and the only thing keeping what’s called ‘inflation’ over 1% is a foreign monopolist supporting the price of crude oil.

So if inflation is this ominously lurking around every corner that requires eternal vigilance to keep from suddenly rearing its ugly head, why have all the Fed’s horses and all the Fed’s men not been able to inflate again? And why would anyone still think they can? I mean, we’re talking about college graduates with advance degrees and resources and power up the gazoo doing everything they can to reflate, and still failing after 3 long years? Not to mention the same in Japan for going on 20 years, where they have college grads with advanced degrees as well (though pretty much from the same schools).

Maybe this inflation thing is harder to get going than it looks? And what did go on in the German Wiemar republic, where if you parked a wheelbarrow full of money thieves would take the wheelbarrow and leave the money? Turns out it was those pesky war reparations that caused government deficit spending to soar to something like 50% of GDP annually, with most of that whopping deficit spending used to sell the German currency and buy foreign currency to pay their war reparations. As expected, that drove their currency down the rat hole in short order, and kept driving it down, causing that famous bout of hyper inflation that didn’t end until that policy ended. And when all that ended and policy changed the inflation stopped dead in its tracks. In one day. So how about Zimbabwe? Turns out they had a tad of civil unrest that dropped their productive capacity by about 80%, but government spending stayed high and too much spending power with too few goods and services for sale drove prices through the roof. Not to mention rumors of insiders using the local currency to buy foreign currencies for personal gain (sound familiar).

Applying this to the US to replicate the Wiemar inflation Congress would have to increase the deficit to about $8 trillion a year and then sell those dollars continuously in the market place, using them to buy the likes of yen, euro, and pounds. And replicating Zimbabwe would mean some kind of disaster that wiped out 80% of our real productive capacity and then continuing to spend federal dollars as if that never happened.

But note that it turns out these examples of hyper inflation are traced back to wildly excessive govt. deficit spending, and not actions by the Central Banks. And, in fact, from what I’ve seen those kinds of levels of deficit spending always cause inflation, no matter what the Central Bank does. For example, deficit spending and indexation of prices paid by government to various measures of inflation propagated all the great Latin American inflations of the relatively recent past, even as the Central Banks desperately hiked rates, didn’t buy securities, and, in general, did all they could to promote price stability.

China gives us an interesting contemporary data point to consider. Deficit spending in China has been running over 20% per year when you include state lending to state owned enterprises, local governments, and other entities where repayment isn’t a factor, making that lending, for all practical purposes, pretty much the same as deficit spending. The only time the US deficit spending got that high, with pretty much the same growth rates, was during World War II. And while considered high, China’s inflation seems to have peaked at about 6%, a far cry form hyper inflation, also, interestingly, much like the US during World War II. And note during World War II, the Fed was entirely accommodative, much like the the Fed is today, buying Treasury securities to keep long term rates low.

What all this tells me is that run away inflation, whatever that might mean, isn’t something hiding around every corner waiting to pounce. In fact, it takes a lot of work to get there, and not from the Fed, but from Congress. And not just what we’d call high levels of deficit spending, but ultra high levels of deficit spending.

I have no fear whatsoever of the Fed causing inflation. In fact, theory and evidence tells me their tools more likely work in reverse, due to the interest income channels. That’s because when they lower rates, they are working to remove net interest income from the private sector, and when they buy US Treasury securities (aka QE/ quantitative easing) they remove even more interest income from the economy. Remember that $79 billion in QE portfolio profits the Fed turned over to the Treasury last year? Those dollars would have otherwise remained in the economy.

So what’s the fundamental difference between what the Fed and can do and what Congress can do? The Fed can’t create net financial assets because they only buy, loan, and otherwise traffic in financial assets. Buying a bond or any other security only exchanges one financial asset for another and therefore doesn’t change the nominal (dollar) wealth of the economy. When the Fed buys a security, that security is no longer held by the economy. The Fed gets the security and the economy gets an equal dollar balance in a Fed account. The exchange is done at market prices so for all practical purposes it’s a equal exchange.

When Congress spends, however, it usually buys real goods and services, and not securities and other financial assets. So when the exchange takes place, Congress gets the real goods and services, which are not financial assets, and the economy gets dollar balances at the Fed, which are financial assets. So spending by Congress adds financial assets to the economy, to the penny, making it very different from what the Fed does.

And note that when the economy buys Treasury securities, all that happens is that the dollar balances the economy has at the Fed in what are called ‘reserve accounts’ get move to dollar balances in what are called ‘securities accounts’ at the Fed. Dollars in securities accounts and reserve accounts are all dollar financial assets. So shifting back and forth doesn’t change the dollar nominal wealth of the economy.

In conclusion, theory and evidence tell me it’s impossible for the Fed to create inflation, no matter how much it tries. The reason is because all the Fed does is shift dollars from one type of account to another, never changing the net financial assets held by the economy. Changing interest rates only shifts dollars between ‘savers’ and ‘borrowers’ and QE only shifts dollars from securities accounts to reserve accounts. And so theory and evidence tells us not to expect much change in the macro economy from these primary Fed tools, making it impossible for the Fed to create inflation.

Post Script:

And don’t be fooled by arguments centering around inflation expectations theory. That does’t hold any water either, and under close examination gets no support from theory or evidence. The only support it gets is from fundamentally flawed assumptions, which I’ll save for another discussion.

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Weidmann comments for MMT on Zero Hedge

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ECB’s Weidmann Spoils The Party: Says Leveraging EFSF Violation Of EU Treaty, Warns Of Hyperinflation

By Tyler Durden

November 8 (Zero Hedge) — Trust the Germans in the ECB (those who have not yet resigned that is) in this case Jesn Weidmann, to come in and spoil the party:

  • Weidmann, speaking in Berlin, says hyperinflation shows why monetizing debt wrong
  • Prohibition on monetary financing an important achievement.
  • Euro treaty rightly forbids monetary financing
  • Stable prices should be key goal of ECB
  • Leveraging EFSF with currency reserves prohibited
  • Says monetary analysis may gain importance at ECB


    • And for all our MMT friends:

  • “One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press:” Weidmann
  • Prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I”


    • Summary from Bloomberg

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    News recap comments

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    The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

    On the negative side –

    · Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
    · Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
    · France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
    · Italian PMI and Spanish employment data were miserable.
    · German factory orders plunged 4.3 percent on the month.
    · The planned EFSF bond for 3bio was pulled.
    · Itraxx financials were +34 while subs were +45.
    · Draghi predicted a recession for Europe along with disinflation.
    · The G20 was flop – there was no agreement on IMF involvement in Europe.
    · The US super committee deadline is 17 days away with no clear agreement.
    · The 8th largest US bankruptcy in history took place.
    · US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
    · German CDS was up 16bps on the week.

    On the positive side –

    · The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

    Too bad what they call ‘easing’ at best has been shown to do nothing.

    · The Fed’s significant downside risk language remained intact.

    Downside risks sound like bad news to me.

    · In the press conference Ben teed up QE3 in MBS space.

    Which at best have been shown to do little or nothing for the macro economy.

    · US payrolls, claims, vehicle sales and productivity came in better than expected.

    And the real output gap if anything widened.

    · S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

    Reinforces the notion that it’s a good for stocks, bad for people economy.

    · Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

    And savers holding those securities saw their incomes cut faster than expected.

    · The ECB cut 25bps and indicated a dovish forward looking stance.

    Which reduced euro interest income for the non govt sectors

    · CME Margins were reduced.

    Just means volatility was down some.

    · There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

    Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

    · The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

    When this makes a list of ‘positives’ you know the positives are pretty sorry

    · The Aussies cut rates 25bps

    Cutting net interest income for the economy.

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    Forbes – Property Prices Collapse in China. Is This a Crash?

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    Reads like the inflation problem was worse then most thought, and that a hard landing might still actually be happening. No way to actually tell in real time.

    With China a first half/second half story, as previously discussed, January will bring a fresh slug of new govt. lending/spending that should at least moderate any fall that’s in progress.

    However, if the anti inflation fiscal policies continue, and spending/lending is materially down from last year, the weakness should persist and potentially get a lot worse.

    Property Prices Collapse in China. Is This a Crash?

    By Gordon Chang

    November 6 (Forbes) — Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.

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    President Obama entering the fray

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    More of the blind leading the blind. The one thing they all agree on, at great expense to global well being, is the budget deficits are all too large and the need for shared sacrifice and all that.

    No chance for anything constructive to come out of any of this.

    And these masters of their money machines don’t even know how to inflate, as they all desperately try to inflate with their versions of quantitative easing, which, functionally, is just another demand draining tax.

    *DJ Merkel, Obama Discussed How To Boost EFSF Firepower Without ECB
    *DJ Obama To Merkel: We Are Totally Invested In Your Success – Source
    *DJ Geithner, Schaeuble May Meet To Discuss IMF Role In Euro Crisis -Source

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    China Extends Crackdown on Off-Balance-Sheet Loans

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    Cutbacks now will further slow things:

    China Extends Crackdown on Off-Balance-Sheet Loans

    July 4 (Reuters) — China’s bank regulator has cracked down on off-balance-sheet lending by the country’s banks, sources told Reuters on Monday, its latest step to prevent over-zealous and risky lending from hurting its financial system.

    China Banking Regulatory Commission (CBRC) has ordered banks to check all their deals in discounted commercial bills after discovering misconduct among some banks, two sources said.

    Chinese banks have in the past year taken to off-balance-sheet lending, or keeping loans outside balance sheets after authorities clamped down on bank loans as part of their fight against inflation.

    Last week the regulator tightened control on sales of wealth management products to ward off potential risks, and the regulator had earlier told banks to include all their loans extended via trust investment programs into their account books.

    Discounted bills, an important source of financing for firms with no access to formal bank loans, accounted for about 2.5 percent of the 49.5 trillion yuan ($7.7 trillion) of total outstanding loans at the end of March, according to data from the Chinese central bank.

    The regulator’s latest move comes after discovering that some rural credit cooperatives and banks in the central Henan province were issuing loans through discounted commercial bills and keeping them outside their loan books.

    Under China’s banking laws, banks’ deals in discounted commercial bills should be reflected on their balance sheets.

    Banks have been asked to investigate all deals linked to discounted commercial bills and submit their findings by Monday, sources said.

    Under the review, banks were ordered to verify that bills issued were based on real transactions, and were ordered to track how extended credit was spent, they added.

    Banks were also instructed to stop discounting bills that they issued to get funds for property and stock investments.

    Analysts welcomed the move towards stringent regulation, which would also boost transparency.

    “There is some concern that some borrowers were using these discounted bills as collateral for further borrowing,” said Mike Werner, a China banking analyst with Sanford Bernstein.

    “So the idea that the CBRC is going to increase diligence covering this area of the market is not surprising.”

    The regulator said bank branches found with serious misconduct would be barred from the discounted commercial bill market entirely, the sources added.

    CBRC was not immediately available for comment when contacted by Reuters.

    As China tightens policy and rein in lending to tame 34-month high inflation of 5.5 percent, many companies are struggling to get loans.

    For these firms, discounted commercial bills are an important source of financing. They let companies bring bills or drafts to banks and request for money to be disbursed before they mature.

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    Modern Monetary Theory: The Last Progressive Left Standing

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    Modern Monetary Theory: The Last Progressive Left Standing

    By Warren Mosler

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    FMOC Minutes

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    New Forecasts (central tendency and range of forecasts) in Table 1 below: Long-Run inflation forecast of 1.6-2.0% is basically their target; 2011 and 2012 unemployment forecasts revised up by 0.6-0.7%. Note that low-end of GDP forecast for 2011 is 2.5%. This is above many other forecasters.


    Interesting Observations from FRB Staff; Outlook revised up, basically on assumption of improved financial conditions; and in turn inflation higher due to less slack and weaker $

    The staff revised up its forecast for economic activity in 2011 and 2012. In light of asset market developments over the intermeeting period, which in large part appeared to reflect heightened expectations among investors that the Federal Reserve would undertake additional purchases of longer-term securities, the November forecast was conditioned on lower long-term interest rates, higher stock prices,
    and a lower foreign exchange value of the dollar than was the staff’s previous forecast.

    The downward pressure on inflation from slack in resource utilization was expected to be slightly less than previously projected, and prices of imported goods were anticipated to rise somewhat faster.

    FOMC Members-Recap of debate of pros/cons of LSAPs; sizing LSAPs; and setting an inflation target, and setting a long-term interest rate target

    Although participants considered it quite unlikely that the economy would slide back into recession, some noted that continued slow growth and high levels of resource slack could leave the economic expansion vulnerable to negative shocks. In the absence of such shocks, and assuming appropriate monetary policy

    They do assume what they do has quite a bit of influence over the outcomes.

    participants’ economic projections generally showed growth picking up to a moderate pace and the unemployment rate declining somewhat next year. Participants generally expected growth to strengthen further and unemployment to decline somewhat more rapidly in 2012 and 2013.

    Several noted that the recent rate of output growth, if continued, would more likely be associated with an increase than a decrease in the unemployment rate.

    While underlying inflation remained subdued, meeting participants generally saw only small odds of deflation, given the stability of longer-term inflation expectations

    They remain steeped in inflation expectations theory as previously discussed.

    and the anticipated recovery in economic activity.

    Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside.

    Participants also differed in their assessments of the likely benefits and costs associated with a program of purchasing additional longer-term securities in an effort to provide additional monetary stimulus, though most saw the benefits as exceeding the costs in current circumstances. Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate. In addition, several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation–an outcome that they thought would be very costly. Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy’s slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets. Several participants saw a risk that a further increase in the size of the Federal Reserve’s asset portfolio, with an accompanying increase in the supply of excess reserves and in the monetary base, could cause an undesirably large increase in inflation.

    This flies in the face of any understanding of banking and actual monetary operations, as well as recent Fed research.

    However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary to avoid an undesirable increase in inflation.


    Participants expressed a range of views about the potential costs and benefits of quantifying the Committee’s interpretation of its statutory mandate to promote price stability by adopting a numerical inflation objective or a target path for the price level. In the end, participants noted that the longer-run projections contained in the Summary of Economic Projections, which is released once per quarter in conjunction with the minutes of four of the Committee’s meetings, convey considerable information about participants’ assessments of their statutory objectives. Participants discussed whether it might be useful for the Chairman to hold occasional press briefings to provide more detailed information to the public regarding the Committee’s assessment of the outlook and its policy decision making than is included in Committee’s short post-meeting statements.


    In their discussion of the relative merits of smaller and more frequent adjustments versus larger and less frequent adjustments in the Federal Reserve’s intended securities holdings, participants generally agreed that large adjustments had been appropriate when economic activity was declining sharply in response to the financial crisis. In current circumstances, however, most saw advantages to a more incremental approach that would involve smaller changes in the Committee’s holdings of securities calibrated to incoming data.


    Finally, participants discussed the potential benefits and costs of setting a target for a term interest rate. Some noted that targeting the yield on a term security could be an effective way to reduce longer-term interest rates and thus provide additional stimulus to the economy. But participants also noted potentially large risks, including the risk that the Federal Reserve might find itself buying undesirably large amounts of the relevant security in order to keep its yield close to the target level.

    No mention at all of the interest income channels, which act to reduce interest income in the economy as rates fall.

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