Whenever the Fed does anything, it causes inflation

Precisely. Inflation prior to 1913 was non-existent, since then the dollar has devalued to 1/25 of its prior valuation.

The poor suffer the most under inflation.

 

The poor suffer more due to the rising cost of petroleum. We all do. The huge increase in demand for oil and natural resources by China combined with the limits on cheap and easy oil is going to be the undoing of the economy. We are almost a decade and half into skyrocketing fuel costs that affect every single thing on the planet commercially produced.

 

A regular feature of the US economy prior to 1913 was boom and bust. Inflation was a primary characteristic of the boom part.
Savers suffer the most under inflation. The poor gain some benefit from inflation because wages rise and debts are easier to pay off.

 

Janet Yellen is more qualified for the job of Chairperson of the Federal Reserve Board than any of her predecessors. Yes! While it's true that Yellen has advocated for more monetary stimulus in recent years, what's more notable is that she has gotten big calls right.

Those economists who have argued for tighter monetary policy have been proven wrong. Inflation rates have been persistently below target, and unemployment has been too high. If Yellen had been in charge of the FED over the past few years, millions fewer would be jobless, and we would be less concerned about the danger of deflation. The point is that Yellen's pragmatic reading of the macroeconomic tea leaves has led her to avoid the errors of her theory-captive colleagues who have seen the threat of inflation around every corner.

Yellen's appointment should be viewed as an "investment" in the FED's dual mandate --- which emphasizes the central bank's role in "taming" both unemployment and inflation.

 

Improved gold mining caused an average of 2% inflation between 1900 and 1914.

 

Let's try to use our crystal ball to see how the Federal Reserve is going to deal with the "inflation" issue under Janet Yellen. Consumer prices were "flat" during most of the last three months, but the lack of "inflation" pressures will probably not stop the FED from scaling back its bond-buying stimulus soon.

The consumer price index has been restrained by declines in gasoline and natural gas prices. The index is up 1.2% over the past year. If I'm not mistaken, the FED target is 2%.

Here's a thought --- If the FED wants an excuse to continue with the full bond purchases it could use the "inflation" numbers. But given the strength we have seen in the labor market, I think they do want to reduce their purchases.

 

It is most likely that the FED will continue to slowly reduce its bond purchases so that interest rates can rise and the economy can adjust without derailing the modest economic growth trend. That way, when economic growth picks up steam as expected over the next few years they will be able to sell them to preclude inflationary pressures without creating undue turmoil in the bond markets which a sudden shift from buying to selling would be sure to generate.

A possibly good thing about Janet Yellen is that she seems to be a pragmatist, not an the ideologue, and the best thing the FED can use right now is a pragmatist who understands both the power and the limits of the FED, someone who will rein in the impulses of ideology as the economy transitions from recovery to sustained growth.

 

A pragmatist is just another word for someone who has no guiding principles. The Fed has the power to influence the market in the short run but it cannot control the outcome of its behaviors. Greenspan inflated the housing boom with his cheap credit, this Fed is no different, they just affected different sectors of the economy.

You can't undo quantitative easing that easily, it will have severe repercussions. The massive distortions created by QE will also appear on the downside when the taper starts to take hold. We have already experienced two emerging market shocks (one at just the suggestion of tapering) and all they have done is diminished purchases by 10 billion? The other unknown factor is the effect of rising interest rates on the public sector which to me seems even more ill equipped to handle it than in 2007. We are out of bullets.

 

Why do you assume interest rates will rise?

 

Greenspan was an ideologue and even apologized for using ideology to guide the Fed, admitting that his ideology had blinded him to obvious economic signals that the economy was going off the rails. He lamented that he should have been more pragmatic about it.

A pragmatist is someone whose perceptions are not blinded by ideology, someone who will not disregard information that does not fit some ideological mindset, someone whose only regard is the most appropriate response that will bring relief to a problem.

The Fed is signalling that it will soon be leaving further economic growth to the private sector, that it is expecting a return to normal economic growth modes. It is inevitable that interest rates will rise and investors will adjust their portfolios accordingly in any economic recovery so a retreat from emerging markets would happen sooner or later anyway. If you find that objectionable then maybe you should be upset about the trade agreements that allow willy nilly massive flows of private speculative capital that create emerging market shocks everywhere all the time instead of just blaming the Fed as if it was their intention.

The public sector outside the federal government has retrenched and is generally in far better fiscal shape than even a few years ago. The huge reduction in public sector employment over the past few years is a major reason why the unemployment rate has not gone down even though more people are being employment in the private sector than ever.

 

The Interbank Rate only rises when the Fed makes it rise.

 

Then why did all those banks pay those $Billions in fines for manipulating the Interbank Rate?

 

I think you are referring to the Libor scandal.
LIBOR (London Interbank Offered Rate) is NOT the Interbank or Overnight Rate.
Two completely different things.

 

If you are referring to the Federal Funds Rate, that is just a reported average of the interest rates that banks with deposits at the Federal Reserve charge each other for overnight loans, the rate for each loan is negotiated privately between the banks themselves. The Fed does set a target rate and may try to adjust its open market activities in order to influence the rate but cannot directly set the Federal Funds Rate.

LIBOR has largely replaced the Fed Funds Rate as the market determinant of overnight and interbank lending rates and replaced it as the reference for a slew of variable interest rates on everything from bonds and mortgages to credit cards. If you look in the fine print of your credit card agreement you are likely to find that the interest rate on your outstanding balance is determined by the LIBOR of some given day of the month plus a percentage.

 

On the contrary, CBs conduct open market operations (adding or draining reserves) to ensure base interest rates remain at that target level.
Absent such intervention (to drain excess reserves) the Interbank Rate falls to zero. It is only intervention that causes the rate to be positive.

LIBOR does NOT determine the Interbank Rate. There is no mechanism of causation. The Interbank Rate is determined by the amount of reserves in the system.

 

I think you have a bit of a misunderstanding of money.

Total spending = money + credit.

So if total spending increases and goods remain the same, the price goes up. I think you get the idea here.

If credit falls (like after a big financial crash), total spending = money + (less credit).

But if we expand the monetary base to offset the drop in credit... total spending remains the same. In other words, the expansion of the monetary base by the fed was simply the agency trying to deal with rapidly falling credit.

 

Monetary policy is normally limited to setting a target rate & conduct Open Market Operation to ensure base interest rates remain at that target level.
Absent this intervention to drain excess reserves, the Interbank Rate falls to zero.

It's a bailout, a form of welfare. It should not be done.
If it causing any inflation it is asset price inflation not commodity price inflation. The money goes into the asset market, bidding up prices. None of it goes into commodity markets & thus cannot possibly cause commodity prices to inflate.

Where do you think the USD comes from?

 

Lending money for free is never going to happen.
The Interbank rate will never fall to zero because banks are in the business of making money, no matter how much is sloshing about the economy.

In the US and other places central banks are required by legislation to pay interest on all reserves that banks have on deposit with them.
Perhaps you could explain why a bank would lend some of its excess reserves to another bank at zero interest when the central bank is paying interest on it.

Actually, Fed open market operations work two ways but in either case the Fed is functioning like any other player in the market, buying and selling financial instruments on public exchanges. When the Fed buys or sells assets on the open market it is at market prices. These activities have some influence in overall market activity because when the Fed buys assets it is increasing the amount of money in the economy and when it sells them it is removing money from the economy.

Your position that Fed activities in the asset markets have no effect on commodity markets is either extremely naive or a deliberate lie. The asset and commodity markets are combined as the largest sectors of financial activity, with most of the same players. The idea that Fed activity in asset markets that increases and decreases the supply of money has no effect on the commodity markets is completely ridiculous because flows of speculative money between these markets are unrestrained and flows of speculative money have become the largest determinant of price change in both the asset and commodity markets.

If there was some barrier or constraint on the flows of money between asset and commodity markets you might have made a point, but there is not so you are just passing grievous misinformation.

 

when the dollar starts to fall which it is the banks will unload it to buy more stable equities and dump it into circulation and that is when you will see runaway inflation. most of the world market is getting away from the dollar and instead putting there trust into gold. China is doing it Russia is doing it and so did Germany
we are going to wake up one morning and the Dollar will not be the worlds currency anymore then America will be in a world of hurt we wont be in charge of our own financial outcome it would be based on either some one else's currency or commodity

 

Gold really is just currency by another name. Its value is based on investor demand more so than the utility of the gold itself. There is only so much to go around and China is also heavily diversifying the backing of its currency with a spread of other global currencies (which is really smart of them IMO). Gold will top out eventually too even in a runaway inflation market.

 

and because gold cant be printed there is no flooding the market with it to cause inflation

 

The public inflation calculation has been manipulated since the Reagan years (Carter first proposed it) when it was recognized the retirement programs were unsustainable, and small adjustments to the CPI calculation (every adjustment always result in a lower CPI than before the adjustment) would result in large reductions in government spending over time. Simpson-Boles suggested yet another "improvement" on the CPI calculation in their deficit reduction proposal presented in Dec 2010.

The original CPI was based on a fixed basket of goods regardless of the consumer, it is now a subjective measure which weights various items based on the consumers changing purchasing behaviour. In other words, the CPI is not an inflation measure but a subjective cost of living measure colored by the govt's desire to keep the CPI low.

Everybody that buys groceries and drives a car knows the inflation rate is above 2%.

 

I think it doesn't matter what any of you think. No matter how smart you think you are. You are not in on the inner dealings that go on. And if you want to tell me this doesn't happen, well, you are a (*)(*)(*)(*)ing idiot. You can think all you want, but it doesn't matter. Unless you are in the "inner" circle. I think it's pretty obvious, whenever there is a deal to be made, there is a bribe to be found. That, my friends, is American Politics, and has been that way for as long as anyone can remember.

 

You obviously don't understand the Interbank Rate.
It is the rate at which banks lend their excess reserves to other banks.
If the banking system on whole has excess reserves & every individual bank has sufficient reserves then those banks with excess reserves will be unable to lend them & the Interbank Rate will fall to zero or to the support rate if interest is paid on reserves.
If the banking system, on whole, is short reserves, banks in competition with eachother will drive the Interbank Rate up & up, all the way to infinity & still some bank(s) will be short reserves.
Only government intervention can provide the reserves.

 

Except the Fed is not the government.

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Except the Fed is not the government.