Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16
Will Venezuela Be Forced to Embrace the US Dollar? - 21st May 16
Danish Central Bank Stumbles with Its Currency Peg to the Euro - 21st May 16
SPX Downtrend Underway - 21st May 16
George Osborne Warns of More Affordable UK Housing Market if BrExit Happens - 21st May 16
Gold And Silver 11th Hour: Globalists 10 v People 0 - 21st May 16
David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - 21st May 16
Gold Stocks Following Bull Analogs - 20th May 16
The Gold Chart That Has Central Banks Extremely Worried - 20th May 16
Silver Miners’ Q1’ 2016 Fundamentals - 20th May 16
Stock Market Rally At the End of the Road? - 20th May 16
British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - 20th May 16
NASDAQ 100, FTSE, and British Pound - When Rare Market Data Screams, Listen  - 20th May 16
Unintended Consequences, Part 1: Easy Money = Overcapacity = Deflation - 19th May 16
The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - 19th May 16
Stock Market Final Supports Are Broken - 19th May 16
Gold - Pro-Inflation? Anti-USD? - 19th May 16
Further Stock Market Uncertainty As Indexes Gained On Friday, Will Uptrend Resume? - 19th May 16
What This U.S. Presidential Election Tells Us About Her Millennial Generation - 18th May 16
Stock Market Trendline Broken on Fed Announcement - 18th May 16
An Incredibly Simple, Rarely Used Way to Book 170% Investing Gains - 18th May 16
Statistically Significant Stock Market Death Cross? - 18th May 16
Precisely Wrong on US Dollar, Gold? - 18th May 16
What You Can Gain From One Tech CEO's $355 Million Loss - 18th May 16
The ‘Tide’ has turned… NEGATIVE For STOCKS!!! - 18th May 16
Goldman Sachs's - Regulatory Climate is Chilling Deals; Hatzius Not Worried About a Recession - 18th May 16
Bitcoin Price Remains above $450 - 18th May 16
Crude Oil Price Trend Forecast 2016 Implications for Stock Market - 17 May 16
Could the National Debt Really Grow as High as $31 Trillion by 2023? - 17 May 16
Gold Price Possible $200 Rally - 17 May 16
Crisis Investing - Jim Rogers on “Buying Panic” - 17 May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

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

© 2005-2016 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

Catching a Falling Financial Knife