Best of the Week
Most Popular
1. Trumponomics Stock Market 2018 - The Manchurian President (1/2) - Nadeem_Walayat
2.Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - Dan_Amerman
3.China is Now Officially at War With the US and Japan - Graham_Summers
4.Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18 - Plunger
5.Stock Market Longer-Term Charts Show Incredible Potential - Chris_Vermeulen
6.U.S. Stock Market Cycles Update - Jim_Curry
7.Another Stock Market Drop Next Week? - Brad_Gudgeon
8.The Death of the US Real Estate Dream - Harry_Dent
9.Gold Market Signal vs. Noise - Jordan_Roy_Byrne
10.The Fonzie–Ponzi Theory of Government Debt: An Update - F_F_Wiley
Last 7 days
Impulse Moves in the Currencies - 15th Aug 19
Best Merlin UK Theme Park Summer Holiday 2018 - Thorpe, Alton Towers, LegoLand or Chessington? - 15th Aug 19
The Essence of Writing an Essay that Must be Understood - 15th Aug 19
Is Solar Energy Rising From The Ashes Again? - 15th Aug 19
A Bullish Bond Argument That Hides in Plain Sight - 15th Aug 19
Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - 15th Aug 19
A Depressed Economy And A Silver Boom - 15th Aug 19
Moving Averages Help You Define Market Trend – Here’s How - 14th Aug 18
It's Time for A New Economic Strategy in Turkey - 14th Aug 18
Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - 14th Aug 18
Dow Stock Market Trend Forecast 2018 - Video - 13th Aug 18
Stock Market Downtrend to Continue? - 13th Aug 18
More Signs That the Stock Market Will Rally Until 2019 - 13th Aug 18
New Stock Market Correction Underway - 13th Aug 18
Talk Cold Turkey Economic Crisis - 13th Aug 18
Which UK Best Theme Park - Alton Towers vs Thorpe Park vs Lego Land vs Chessington World - 12th Aug 18
USD is Rising. What this Means for Currencies and Stocks - 12th Aug 18
Hardest US Housing Market Places to Live - Look Out Middle Class - 12th Aug 18
America’s Suburbs Are Making a Comeback - 12th Aug 18
Stock Market US Presidential Cycle, Seasonal Analysis and Economy - Video - 12th Aug 18
Yield Curve Inversion and the Stock Market - Video - 11th Aug 18
Land Rover Discovery Sport 1st Dealer Oil Change Service - What to Expect - 11th Aug 18
How to Setup Webinars and Use Them to Overcome the Barriers in E-Learning - 11th Aug 18
Big US Stocks’ Q2’18 Fundamentals - 11th Aug 18
Dow Stock Market Trend Forecast 2018 - 10th Aug 18
SPX Testing Its First Support Level - 10th Aug 18
Dreaming of a "Comfortable Retirement" on a Public Pension? - 10th Aug 18
The Forrest Gump of All Future Democrat Election Losses - 10th Aug 18
More Uncertainty as Stocks Got Closer to January Record High - 10th Aug 18
Gold and Silver Kill Zone - 9th Aug 18
Even More Cracks in the Gold Dam - 9th Aug 18
Ignore the Stock Market “midterm election year”, Which is “supposed” to be Weak - 9th Aug 18
Stock Market Trend and Volatility Analysis - Video - 9th Aug 18
Tips on Maximizing Small Serviced Offices Space - 9th Aug 18
VIX’s Collapse is Bullish for VIX and the Stock Market - 9th Aug 18
Vestles Platform Offers Several Key Trading Tools - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 2 - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 1 - 8th Aug 18
Stock Market US Presidential Cycle and Seasonal Analysis - 8th Aug 18
Is the Stock Market Correction Over? - 7th Aug 18
Yield Curve Inversion and the Stock Market - 7th Aug 18
Stock Market Elliott Wave Analysis and Forecast - Video - 7th Aug 18
Trade War! Win the Economic Hostilities Against the Chinese - 7th Aug 18
Technical Analyst Sees Silver as 'Oversold' - 7th Aug 18
Alex Jones Banned! Will Unapproved Opinions Be Censored Off the Internet? - 7th Aug 18
Gold and Silver Stocks On the Verge of the Next Major Decline - 7th Aug 18
First Time Buyers Need to ‘boost the affordability’ of Their Move Alone  - 7th Aug 18
Long Term Care Homes as an Investment are Heating Up! - 7th Aug 18
The Exponential Inflationary Stocks Bull Market - Video - 6th Aug 18
Land Rover Discovery Sport Oil Change Service Dash Warning Message - 6th Aug 18
Restructuring of Western Economic Power - 6th Aug 18
Stock Market Trend and Volatility Analysis - 6th Aug 18
Stock Market and Economy False Narratives That are Just Wrong - 6th Aug 18
VPN – Is It Worth It? - 6th Aug 18
All You Need to Know About Umbrella Companies - 6th Aug 18
Why China Lost the Trade War Before it Even Began - SSEC Stocks Index - Video - 5th Aug 18
Dow Stock Market Elliott Wave Analysis - 5th Aug 18
Iran's Rial Currency Is In A Death Spiral, Again - 5th Aug 18
IMF Produces Another Bogus Venezuela Inflation Forecast - 5th Aug 18
Gold & Silver Precious Metals Monthly Charts - 5th Aug 18
Time to Position for a Decade-Long Bull Market in Natural Resources - 5th Aug 18

Market Oracle FREE Newsletter

Trading Any Market

New Risk for Investors: Fed Considers Jacking Up Inflation Target

Economics / Inflation May 04, 2017 - 06:55 PM GMT

By: MoneyMetals

Economics

Stefan Gleason : Investors are under-estimating inflation risk. As a consequence, they are under-pricing inflation protecting assets including precious metals.

The Federal Reserve has given itself the objective of engineering an inflation rate of around 2%. However, there are many ways in which real-world inflation can potentially outpace the Fed’s 2% target.


Firstly, the Fed’s preferred inflation gauges are flawed. The so-called “core” rate of consumer price inflation strips out food and energy costs. The core Personal Consumption Expenditures (PCE) index has also been criticized for underweighting housing and medical costs.

The PCE number for March, which came out on May 1st, shows the Fed’s favored inflation gauge running at 1.6% year over year. That’s down slightly from the previous month’s reading of 1.8% (2.1% for the headline unadjusted PCE).

Since 2012, the core inflation rate has been running below the Fed’s 2% target. That has caused investors to grow complacent toward inflation risk. They seem to be operating under the assumption that 2% is a ceiling.

That is a dangerous assumption – not only because of food and energy inflation not being properly accounted for, but also because even the official “core” number could rise well above target for extended periods.

Fed Insiders Call for 4% Inflation Target

The 2% target itself isn’t set in stone. In fact, some current and former Fed governors would like to see the central bank pursue a more flexible inflation objective. Peterson Institute economist Olivier Blanchard argues the Fed ought to raise its target to 4% in order to make up for several years of below-2% inflation.

Former Federal Reserve chairman Ben Bernanke recently wrote a piece for the Brookings Institute in which he proposed ways to re-jigger the Fed’s inflation target. According to Bernanke, “in a changing world of imperfect credibility and incomplete information, private-sector inflation expectations are not so easy to manage.”

In other words, the Fed lacks the knowledge and credibility to be able to directly control what businesses and individuals think future inflation rates will be. That’s a problem for the central bank to the extent that expectations for inflation can be self-fulfilling and fail to match up with the centrally planned target.

What’s a central planner to do? Bernanke suggests implementing a more flexible inflation target.

“Looking forward, it is likely that the determinants of the ‘optimal’ inflation target—such as the prevailing real interest rate, the costs of inflation, and the nature of the monetary policy transmission mechanism—will change over time,” he wrote.

Bernanke Proposes Targeting Higher Prices on Goods and Services

Rather than a fixed numerical target, Bernanke argues the Fed could target price levels. A 2% annual inflation rate implies that a basket of goods costing $100 today would, in 20 years, cost $148.59. If the Fed targets that particular price level, then years of undershooting 2% inflation would require years of overshooting to stay on target.

Ben Bernanke’s conclusion: “The adoption of price-level targeting would be preferable to raising the inflation target.”

Armed with novel justifications for letting inflation run higher, the Fed is far from being held down by its putative 2% inflation objective. The risk for investors is that inflation at some point does start running higher than 2% – perhaps significantly higher.

Once unleashed, inflation could prove hard for policy makers to keep a lid on. The Fed can try to manipulate mass psychology.

It can control short-term interest rates and try to restrain money supply growth. However, it cannot directly control money velocity or long-term interest rates.

Recent yields on 10-year (2.3%) and 30-year (2.9%) U.S. Treasury bonds reflect the widespread belief that the Federal Reserve will hold inflation at 2% and allow bondholders to eke out small real returns.

Yet with government debt at $20 trillion and rising... with forecasts for the debt to GDP ratio to rise well over 100% to Third World levels in the next decade... the government can’t afford to keep paying out positive real rates of interest on its bonds.

The world’s biggest debtor will have to default or (more likely) devalue the currency in which its debts are denominated. Maybe not this year or next. But in the foreseeable future, bondholders will face the prospect of staggering real losses as inflation rates outstrip low fixed yields on debt instruments.

Inflation Punishes Savers and Bails Out Debtors

Inflation serves as a sort of hidden tax. It punishes savers and consumers as it rewards and bails out debtors – the biggest of all being the U.S. government. The temptation for Congress to rely on the Fed’s printing press to finance its otherwise unsustainable deficit spending is simply too great.

Bonds and other dollar-denominated financial instruments are currently priced as if inflation won’t be a problem for the next three decades. Meanwhile, gold, silver, and other hard assets are selling at discounts because most investors aren’t concerned about inflation protection.

They should be. Now is the time to be concerned. By the time rising inflation rates are a full-fledged economic reality, you can bet precious metals prices will be far higher than where they sit today.

Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.

© 2017 Stefan Gleason - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 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

6 Critical Money Making Rules