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More at the source.The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing moneyand in a reckless fashionfor years.
The Obama administration has run huge budget deficits every year, which, together with the Bush administration, has amounted to $6.7 trillion from 2006 to 2013. The Federal Reserve financed almost $3 trillion of these deficits by purchasing Treasury bonds and notes. The Fed has also purchased massive amounts of mortgage-backed securities. Today, with more than $2.5 trillion of idle reserves on bank balance sheets, there is enormous fuel for greater inflation once lending and money growth rises.
To avoid the kind of damaging inflation the U.S. experienced in the 1970s and early '80s, the Fed could raise interest rates, including the interest it pays banks on reserves, inducing banks to hold most of the $2.5 trillion of reserves idle. But interest rates high enough to discourage borrowing and lending would likely send the economy into another damaging recession.
Fed Chairwoman Janet Yellen recently admitted that the central bank doesn't have a good model of inflation. It relies on the Phillips Curve, which charts what economist Alban William Phillips in the late 1950s saw as a tendency for inflation to rise when unemployment is low and to fall when unemployment is high. Two of the most successful Fed chairmen, Paul Volcker and Alan Greenspan, considered the Phillips Curve unreliable. The Fed's forecasts of inflation ignore Milton Friedman's dictum that "inflation is always and everywhere" a result of excessive money growth relative to the growth of real output. The Fed focuses far too much attention on distracting monthly and quarterly data, while ignoring the longer-term effects of money growth.
The country's present dilemma originated in 2008, when the Fed properly and forcefully prevented a collapse of the payments system. But long before idle reserves reached $2.5 trillion, the Fed didn't ask itself: What can we do by adding more reserves that banks cannot do by using their massive idle reserves? The fact that the reserves sat idle to earn one-quarter of a percent a year should have been a clear signal that banks didn't see demand to borrow by prudent borrowers.
The Fed's unprecedented quantitative easing since 2008 failed to lead to a robust recovery. The unemployment rate has gradually declined, but the main reason is that workers have withdrawn from the labor force. The stock market boomed, bringing support from traders, but the rise in asset prices of equities didn't stimulate growth by inducing investment in new capital. Investment continues to be sluggish.
And some side effects of the Fed policies have had ugly consequences. One of the worst is that ultralow interest rates induced retired citizens to take substantially greater risk than the bank CDs that many of them relied on in the past. Decisions of this kind end in tears. Another is the loss that bondholders cannot avoid when interest rates rise, as they have started to do.
With the Fed's policy statement in March and remarks from Fed Chair Janet Yellen later in the month striking a cautious tone, strategists say this has set the stage for a rough patch for the dollar over the near-term as inflation nips at it. U.S. inflation has firmed in recent months, with the core Consumer Price Index rising 2.3 percent in the 12 months through February to mark the largest increase since May 2012. The core personal consumption expenditures price index, which is the Fed's preferred measure, gained 1.7 percent in the 12 months ended in February. The core inflation readings exclude food and energy prices. The Fed is targeting a 2 percent core PCE reading.
Inflation typically undermines the dollar's strength by diminishing its spending power. Differences in inflation rates between the United States and the euro zone have been the main force behind the dollar's value against the euro since 2000, according to a research report from Fundstrat Global Advisors. While expectations for higher inflation once tended to ramp up bets on a swifter pace of Fed rate hikes and, in turn, boost the dollar, strategists say the perceived improbability of a Fed rate hike until at least June has reinstated inflation’s traditional role of eroding the dollar’s value. "If inflation in the U.S. is relatively high, but interest rates aren’t expected to move higher... that doesn’t ultimately bode well for the dollar," said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York.
Jalinoos sees the euro hitting $1.17 against the dollar within the next three months. That suggests 2.7 percent more downside for the dollar against the euro. Ian Gordon, foreign exchange strategist at Bank of America Merrill Lynch in New York, says the Fed could wait before hiking rates even if core PCE reached its 2 percent target. He notes Yellen expressed skepticism last month that gains in inflation were sustainable. A Reuters poll on Friday showed the median expectation among top Wall Street banks that deal directly with the Fed was for a year-end inflation rate of 0.875 percent, implying just two rate hikes this year.
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For most on the right, unfortunately, all they have is partisan nonsense.LMAO! They've been crying wolf about inflation for years now. This country has done an amazing job of recovering from near financial collapse 8 years ago. We should all set aside the partisan nonsense and congratulate ourselves on a remarkable recovery. Name another country that could have pulled this off.
The absurdity of your claims flies in the face of reality.
