Will the Fed be able to control deficits, interest rates AND inflation?
*Bloomberg, by Rich Miller & Michael McKee, June 22, 2009:
“Chairman Ben S. Bernanke has to convince investors the Federal
Reserve can take back more than $1 trillion it pumped into the U.S.
banking system to pull the economy out of the longest decline in more
than six decades.
Bernanke and his colleagues, who meet June 23 and 24 to map monetary
strategy, have said they need to continue buying assets and keep
interest rates low for a long time to help revive growth. Rising
Treasury bond yields show Wall Street is concerned their policy may
lead to an inflationary bubble: Ten- year notes reached an eight-month
high of 3.95 percent June 10.
‘The markets don’t understand the Fed’s exit strategy; they’re
confused,’ said Lyle Gramley, a senior economic adviser with New
York-based Soleil Securities Corp. and former central- bank governor.
‘That’s contributed to the rise in long-term rates.’
The risk is that higher rates will hold back the budding economic
recovery by lifting borrowing costs for homeowners and buyers.
Economists surveyed by Bloomberg forecast growth of 0.5 percent in the
third quarter after gross domestic product shrank for four consecutive
quarters -- the first time that’s happened since 1947.”
“While investor optimism about the economy may be contributing to
higher yields, there are still worries about the record $1.8 trillion
budget deficit, along with the concern about the Fed’s plans, Gramley
said.
In an effort to contain borrowing costs, Fed officials are considering
using the policy statement issued after this week’s meeting to try to
suppress any speculation they’re prepared to boost interest rates as
soon as this year.
If policy makers are going to restrain rates, investors and analysts
say they should explain how they will cut the central bank’s balance
sheet and prevent inflation from accelerating.”
“In the U.S., concern is growing that consumer-price inflation will
accelerate, based on trading in Treasury Inflation Protected
Securities. Expectations for 2015 to 2019 -- the so-called five-year,
five-year-forward rate calculated by the Fed -- increased June 2 to
3.18 percent, the highest since November, before sliding to 2.79
percent on June 17. The average since 2005 is 2.66 percent.
Behind investor unease is a $1.2 trillion jump to $2.07 trillion during
the past year in the portfolio of mortgage, Treasury and other
securities the Fed owns, as it flooded the banking system with
reserves. The balance sheet rose to a record $2.31 trillion in December
and has fallen since as the financial crisis eased and banks’ demand
for short-term credit ebbed.”
“Meanwhile, the Fed is adding to its holdings of long-term securities,
pledging to buy this year as much as $1.25 trillion of mortgage
securities, $200 billion of agency debt and $300 billion of long-term
Treasuries.
The purchases have come as the government embarked on a $787 billion
stimulus program to boost the economy. Bernanke, 55, denied on June 3
that the Fed was helping to fund the deficit by buying Treasuries.
Anxiety over the Fed’s pump-priming program is twofold, according to
Robert Eisenbeis, chief monetary economist at Cumberland Advisors in
Vineland, New Jersey. The first worry is the central bank lacks the
tools to unwind its monetary stimulus quickly enough. The second is
that even if it can act in time, it won’t because of political
opposition to tightening credit when unemployment is 9.4 percent, a
25-year peak.”
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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