Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14
MH17 Crash Next Phase Economic Warfare - 22nd July 14
The TRUTH about China’s Massive Gold Hoard - 22nd July 14
Forex Multi-week Consolidation in EUR/USD Ended - 22nd July 14
Bitcoin Price Medium-term Trend Being Tested - 22nd July 14
Beware Of The Flash Mob - 22nd July 14
Can Putin Survive? - 22nd July 14
Israel Assault on Gaza: A Historic Crime, Nazi Like Final Solution - 22nd July 14
Zionist Israel an International Pariah - 22nd July 14
Reflections on the Global Misery Index - 22nd July 14
GDP Economic Statistic : A Brief But Affectionate History - 22nd July 14
TransTech Digest: Super Battery Bio-Power vs. Dirty CleanTech - 21st July 14
How to Find Trading Opportunities in the Currency Markets - 21st July 14
Stock Market One More Pull Back - 21st July 14
The Conquest Of Real - Degenerate Philosophies of the Book - 21st July 14
A Clear Way to Profit from a Graying Population - 21st July 14
Last Chance Critical Financial Market Forecasts Special Total Access - 21st July 14
Stock Market Crash Nightmare! - 21st July 14
Why the Stock Market Is STILL Cheap - 21st July 14
From Gore-Bore To Gore-War - 21st July 14
Gold Price Looking Drab - 21st July 14
An In-Depth Look at Gold Chartology - 21st July 14
The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - 20th July 14
AUD NZD Taking The Forex Bull By The Horns - 20th July 14
US-backed Israeli Invasion of Gaza Unleashes Death and Destruction - 20th July 14
The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - 20th July 14
Stock Market in DANGER of Strangling the Bears to Death - 20th July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Inflation Targeting is Dead, Long Live Inflation!

Commodities / Inflation Dec 14, 2012 - 01:05 PM GMT

By: Adrian_Ash

Commodities

The Fed actually thinks it can drive 315 million souls through a 0.2% gap in its forecasts...

REMEMBER INFLATION? Central bankers do – and they want to get rid of it, writes Adrian Ash.

Not in the way they used to get rid of it. Back then they would raise interest rates to curb debt-fuelled spending. Whereas now they want to throw inflation out of their policy targets instead.



The true aim being to welcome it back to the real economy.

America's zero interest rates, said the US Federal Reserve on Wednesday, "will be appropriate at least as long as the unemployment rate remains above 6.5%." Coming just a day after 2013's new Bank of England governor Mark Carney said he wants to swap inflation for GDP targeting, this marks a new stage in a big and global shift.

Yes, inflation does get a look-in. The Fed swore Wednesday that it will keep rates at zero only so long as inflation "is projected to be no more than a half percentage point above the Committee's 2% longer-run goal" over the next one to two years. But that projection is of course the Fed's to make. And its 2.0% inflation target is already being fudged.

Half-a-point here, half-a-point there, who cares? Other than consumers, businesses, savers and everyone else.

Also note – the Fed didn't say that hitting its new jobless rate will definitely trigger a rate rise. And that 6.5% level for US unemployment is itself an ambitious goal. Since 1948, US unemployment has averaged 5.8%. It stood at 7.7% in November, and it has stood at or below 6.5% in only 550 of the last 780 months.

In short, strong returns to cash savers remain a very long way off yet. Higher inflation will meantime be tolerated – welcomed, even – as part of cutting Western governments' huge debt burdens. Real rates of interest, after inflation, are likely to get worse below zero. Not least because, while failing to raise interest rates, central banks will continue to print money to buy government bonds – thereby pushing down the interest rate they offer to other investors (ie, you and the entire retirement savings industry).

"If Ben Bernanke thinks 4% is an appropriate level for inflation in the US," says Jim Leaviss, blogging at UK fund giant M&G, "you wouldn’t be lending money to the government at 0.65% for the next 5 years would you?

"And with Mark Carney taking over at the Bank of England next year, market inflation expectations [you would imagine] would be overshooting the 2% inflation target over the next few years too?"

Put another way, "It's fairly clear, although not explicitly stated," says the Fed chairman's sometime colleague and chum, Paul Krugman, "that the goal of this pronouncement is to boost the economy right now through expectations of higher inflation and stronger employment than one might otherwise have expected."

So why would anyone hold fixed-income government debt? Abandoning all pretence (at last) of targeting low inflation, central banks clearly want to see higher inflation. Because in the Fed's plan – if not in reality, history or anyone else's model since the late 1970s – the idea is that this will boost employment. So looking ahead to 2015, the US Fed's previous dateline for any fear of a rate hike, "Financial institutions that want to report nominal earnings, let alone avoid real losses on portfolios that will then include $15.5 trillion of US obligations that pay essentially zero, will be desperately reaching for yield and risk," writes Berkeley professor Brad DeLong. "And whatever risky assets they buy to get some yield into their portfolios will trigger somebody to then spend more on currently-produced goods and services.

"[So] that possible future world," says DeLong, "is not a future world in which unemployment is still above 6.5% and forecast core inflation is still below 2.5% per year." And yet the US Fed itself, also issuing new forecasts after Wednesday's new policy announcement, says precisely that. All the new policy aim has achieved, together with a fresh $45 billion of quantitative easing each and every month from hereon, is to tweak the forecast 2015 range for US joblessness from September's guess of 6.0-6.8% to this month's guess of 6.0-6.6%. Core US price inflation is actually forecast to fall, hitting a 2015 range of 1.8-2.0%.

Is DeLong saying Ben Bernanke is lying? Or did he fail to check the Fed's new predictions? Maybe the Fed is being disingenuous, ignoring the impact of its policies on inflation so it can gain the political support needed to allow them. Or maybe, just maybe, the fact is that the Fed – like all other central banks today – is worse than clueless.

Frantically yanking its levers and smashing its dials, it actually imagines it can direct the economy, now this way, now that, and drive 315 million souls through a 0.2% gap in its forecasts. Yet instead, it risks driving the currency over a cliff.

"At the surface level," Brad DeLong explained long ago, in a 1996 paper, the awful inflation of the 1970s happened because no one who could "placed a high enough priority on stopping inflation." Worse still, "no one had a mandate to do what was necessary." Beating unemployment with cheap money was thus the only tool in the box. So by God they would use it, even if it worked about as well as beating an egg with a shovel.

Viewed from the zenith of central-bank independence in the mid-1990s, "It is hard to see how the Federal Reserve could have acquired a mandate [to tackle inflation by raising rates sharply] without an unpleasant lesson like the inflation of the 1970s," concluded DeLong in that paper.

You might think that keeping inflation low is what central banks are for. But that's so late-20th century! And the Fed this week walked further away from that mandate. Central banks everywhere are similarly losing their "independence" to keep inflation in check. So guess what comes next – what must come next – before there's any true chance of central banks hiking their rates to try and curb your cost of living.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014