My kids loved the Harry Potter novels during their youth. The quote from the books “He Who Must Not Be Named” that referenced Lord Voldemort, the main antagonist, has significant similarities to the Federal Reserve today.
Is the Fed fighting deflation and just not speaking the word?
Recently the Fed has indicated that they may not tighten monetary policy even if the unemployment rates drops below 6.5%. The reason is that inflation is too low. Last month readings around the world tells us that this is not just an American problem (1.2% core inflation), but is worse in Europe (0.8% core inflation) and has been in place in Japan (0.0% core inflation) for over 15 years.
The Fed is printing money to buy $85 billion a month in bonds to stimulate the economy. Let’s put this in perspective… The City of Nashville TN based on June ’12 financial statements has $2.7 billion in total outstanding long-term debt. Yes…. each month the Fed could buy all the bonds of 31 cities with a similar debt load as Nashville, TN. This is every month… outstanding!
The housing market is better, auto sales are back, consumers debt loads are in good shape. Why will the Fed not take their foot of the pedal?
The answer in my opinion is that they are “All In”… and the enemy is deflation. If Lord Voldermort and the Death Eaters have their way and the economy slips into a recession with the Fed’s pedal to the metal, then I fear the Fed may not have any spells left in their arsenal to protect the economy.
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