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Can the Fed control what prices it pumps up?

*Barron's, by Randall W. Forsyth, September 28, 2012

”The Federal Reserve has said it intends to keep short-term rates pinned virtually at zero all the way out to mid-2015 — years after it adopted the zero-rate policy in late 2008 during the financial crisis.  In addition, the Fed has said it will buy $40 billion a month in mortgage-backed securities issued by federal agencies such as Fannie Mae and Freddie Mac, its third iteration of quantitative easing, in addition to continuing its plan to extend the maturities of its securities holdings.

Moreover, the central bank said it will continue its securities purchases until it saw the labor market improve ‘substantially.’  And it would maintain its ‘highly accommodative stance’ for a well ‘after the economic recovery strengthens.’

In other words, instead of worrying about the Fed removing the punch bowl once the party gets going — to use the phrase of the late former Fed Chairman William McChesney Martin — Bernanke has promised it to keep spiking it until the economy has gotten a snoot full.

As Stephanie Pomboy deftly details in her latest MacroMavens missive, there’s no question about the ability of the Fed to generate inflation.  The problem is that it can’t control what it inflates with the money it prints.  Clearly, Bernanke & Co. would dearly desire asset prices — houses and stocks especially — to levitate and impart the sort of irrational exuberance that hooch in the punchbowl provides.

The risk is that the booze can send the price of things such as oil heading skyward.  And in a literal instance, a British futures broker on a binge single-handedly pushed up the price of crude oil with unauthorized trades totaling some $520 million in the middle of night in June 2011, according to a report released Thursday by the Financial Services Authority.

More importantly, the price of commodities that ordinary folks need to buy are up sharply while they miss out on the rally in other risk assets such as stocks and junk bonds.  Gasoline is around $4 a gallon and a loaf of bread or a box of cereal fetches even more.  Not only can’t the Fed control what prices it pumps up, Pomboy observes, it can’t be counted on to bring those prices under control — even when the inflation pressures push up long-term interest rates.

That, to be sure, is a problem to be reckoned with — eventually.”

*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.

Aftershock Investor