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November 3, 2010

Will the Fed's unconventional monetary policy lead to more inflation and higher gold prices?

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''Federal Reserve Chairman Ben S. Bernanke embarked on a historic test of unconventional monetary policy by using tools devised during the financial crisis to add fuel to an economy that's been expanding for 15 months.

Bernanke's Fed, constrained by a key interest rate near zero and bound by a Congressional mandate to reduce unemployment, yesterday said it would buy $600 billion in Treasury securities through next June in a bid to further reduce long-term borrowing costs and keep prices from falling.

The dollar weakened and stocks rose as the quantity of purchases exceeded the expectations of some investors.  Bernanke is gambling he can push down a jobless rate that has been stuck above 9 percent since the recession ended in June 2009 and encourage investors to take more risk without igniting an inflationary surge or fueling asset-price bubbles.

'The Federal Reserve is under-performing on all of its objectives -- by law it has to do something,' said Allen Sinai, chief global economist at Decision Economics Inc. in New York.  'I don't think we pay them to sit on their hands and wait for good times.  I will take any mistakes they make in return for the effort.'

Central bankers aim to accelerate U.S. economic growth above a 2.5 percent annual rate to push unemployment lower.  The purchases, which come on top of $1.7 trillion of securities the Fed bought through last March to fight the financial crisis, equal roughly a 0.75 percentage-point cut in the federal funds rate, according to the Fed's internal estimates.

'Disappointingly Slow'

The Federal Open Market Committee said in its statement yesterday that it was compelled to act because 'progress' toward their objectives of full employment and stable prices 'has been disappointingly slow.'

'The Fed's statement is historic in its emphasis on the dual mandate, and doing quantitative easing in a non-financial crisis situation is historic,' said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.  'They are clearly pretty serious about delivering' on jobs and growth.

Combined with about $300 billion in reinvestment of the Fed's maturing mortgage bonds, total purchases could run as high as $900 billion, or about $110 billion a month, the Fed said.  Some economists doubted whether the purchases would have much of an impact.

'I am hesitant to say it is going to yield the kind of impact we need to see to return the economy to trend growth,' said Timothy Duy, a University of Oregon economist who formerly worked at the U.S. Treasury Department.  'I am not impressed by the magnitude.' ''

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. 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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