25 January 2012

FOMC Statement - Targets 2% Inflation - Highly Accommodative Monetary Policy Until 'Late 2014'

The Fed extended its window of highly accommodative monetary policy to 'late 2014.' In a separate statement the Fed said it is targeting "2% inflation" as a target. This is the first time they have named an explicit inflation objective. The limiting factor of this decision is the value of the US dollar relative to hard goods, and not other fiat currencies which are subject to similar manipulation and soft devaluation.

The inflation target will be measured using PCE rather than any variation of CPI.

So unless there is a major policy error, deflation seems to be 'off the table' as an option at least as far as the Fed is concerned.

The initial market reaction is for stocks to come off their lows, and gold and silver to rally sharply. Now we know why they were sitting on them so hard. If they had not I suspect we would see gold breaking out over 1700 and silver well past 33. This goes beyond the management of perception into the realm of a control fraud by the banks. I hope that when the truth comes out that people will not be persuaded to ignore that distinction.

This statement shows a longer term commitment to de facto QE at least. The Fed does not need to further expand its balance sheet just yet, but rather deploy those funds strategically while engaging in swaps with other central banks to counter the financial risks globally.

I suspect that before they formally announce a further expansion of their balance sheet the Fed will go 'off-balance sheet' in the easing as financial firms are often wont to do when engaging in opaque accounting. The swaps and non-competitive bidding for balance sheet assets may be a part of this.

I do not object to stimulus per se, but rather this type of blunt policy that does not address or repair the problems that led to the financial bubble and collapse in the first place, which is largely the reform of the financial system, the yawning gap between productive labor and mere money manipulation, and the hard choices required to resolve the TBTF banking problem and unsustainable concentration of both power and risk.

This is against the backdrop of the extended infomercial for crony capitalism coming from the financial conclave at Davos. Demagoguery and deception in support of the status quo seems to be the rule of the day in the financial sector and its associated professions and exclusive clubs.

Therefore self-regulation, restraint, and reform are a thin bet to say the least. The crisis is more like to continue to expand, and the taint of corruption and crime continue to spread.

"When a man has so far corrupted and prostituted the chastity of his mind as to subscribe his professional belief to things he does not believe, he has prepared himself for the commission of every other crime."

Thomas Paine
So the set up and trend seems to be for a more notably historic impulse for change.

For immediate release
Federal Reserve Open Market Committee
January 25, 2012

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.