Best of the Week
Most Popular
1.Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - Nadeem_Walayat
2.Gold and Silver Stocks Apocalypse Now, Bear Market Review - Rambus_Chartology
3.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
4.Ebola Terror Threat Suicide Bio-Weapons Threatens Multiple 9/11's, Global Plague - Nadeem_Walayat
5.Second-Richest Man Says Mortgages Now a "No Brainer" - Dr. Steve Sjuggerud
6.Gold And Silver Still No End In Sight - Michael_Noonan
7.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
8.The Gold Bug is Set to Bite Back - EWI
9.How Alibaba Could Capitalize on the EBay-PayPal Split - Frank_Holmes
10.The Consequences of the Economic Peace - John_Mauldin
Last 5 days
Bullish Silver Stealth Buying - 24th Oct 14
Blood in the Streets to Create the Gold Stocks Investor Opportunity of the Decade - 24th Oct 14
Swiss ‘Yes’ and ‘No’ Gold Initiative Campaigns Compete at Launches in Bern - 24th Oct 14
War And The Law Of Unintended Consequences - 24th Oct 14
Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - 24th Oct 14
Saudi Move to Cut Oil Prices Is Now Russia's Biggest Economic Threat - 24th Oct 14
US Stock Market Top Is Now In Sight - 24th Oct 14
New Profit Points in the Shifting Balance of Power, Welcome to Saudi America - 24th Oct 14
QE Failure & Folly Of Paper Mache, Treasury Bond Integrated Lifeline Patches - 24th Oct 14
U.S. Economy Faltering Momentum, Debt and Asset Bubbles - 23rd Oct 14
Annuities - Afraid Your Money Will Vanish before You Do? - 23rd Oct 14
What Debt Deleveraging? - 23rd Oct 14
How to Profit from Massive Spin-Offs with Just One Play - 23rd Oct 14
Evaluating Ebola as a Biological Weapon - 23rd Oct 14
Euro, USD, Gold and Stocks According to Chartology - 23rd Oct 14
Why You Should Always Be Invested in the Stock Market (Even Now) - 23rd Oct 14
Five U.S. Housing Market Warning Signs Point to Real Estate Market Downturn - 23rd Oct 14
The Better Short: Gold or Silver? - 23rd Oct 14
Focus on Graphite Companies with Green Energy and Technology Strategies - 22nd Oct 14
Crude Oil Price Hitting Bottom - 22nd Oct 14
Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - 22nd Oct 14
Gold Or Crushing Paper Debt Stocks Crash? - 22nd Oct 14
India Gold Demand Surges 450% and Bank of Russia Demand At 15 Year High - 22nd Oct 14
Bitcoin Stock Exchange Could Be "More Valuable than Alibaba" - 22nd Oct 14
Currency War - How to Profit from a Stronger U.S. Dollar - 22nd Oct 14
Banks Hold Treasuries and Make Loans- 22nd Oct 14
Gold and Silver Timing is Everything - 22nd Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VII) - 22nd Oct 14
Follow the Baby Boom to Biotech Stock Profits - 22nd Oct 14
Copper, Nickel and Zinc Won't Be Cheap for Long - 22nd Oct 14
How Will We Know That the Gold & Silver Price Bottom Is In? - 21st Oct 14
Is Gold as Dead as Florida Hurricanes? - 21st Oct 14
First Swiss Gold Poll Shows Pro-Gold Side In Lead At 45% - 21st Oct 14
The Similarities Between Germany and China - 21st Oct 14
The REAL Reason Why the Stock Market Turned Down - 21st Oct 14
Petrobras is a 'Scheme, Not a Stock' - 21st Oct 14
Stocks Bear Market Indicator Is Off the Mark - 20th Oct 14
Stock Market Ideal Turning Point is at Hand - 20th Oct 14
Investors Quit Complaining, The Environment is Perfect Right Now - 20th Oct 14
Ebola Armageddon Could Trigger a Rebirth in Gold and Silver Prices - 20th Oct 14
Gold vs Euro Risk Due To Possible Return of Italian Lira - Drachmas, Escudos, Pesetas and Punts? - 20th Oct 14
Stocks Rebounded Following Recent Sell-Off, But Will It Last? - 20th Oct 14
U.S. Responsible for West Africa Ebola Outbreak Says Liberian Scientist - 20th Oct 14
Stock Market Intermediate B Wave has Started - 20th Oct 14
Gold Stocks Analysis – FNV, CG, NCM, SBM - 19th Oct 14
Stock Market Primary IV Wave Counter Trend Rally - 19th Oct 14
Gold And Silver - Financial World: House Of Cards Built On Sand - 18th Oct 14
Anatomy of a Stock Market Sell-Off - 18th Oct 14
Why OPEC Has Declared an Oil War on Russia - 18th Oct 14
Gold and Silver Extreme Shorting Peaks - 18th Oct 14
Bitcoin Price Fall to $350? - 18th Oct 14
Tesco Supermarket Crisis Worse To Come as Customers Vanish! - 18th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

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