It is becoming even more clear that Establishment economists are now equating the rate of inflation to prosperity. Across the board, they are clamoring for the Fed to take action that will result at least 2 percent inflation.
Two percent inflation is the stated inflation goal of the world’s three most powerful central banks: US Fed, the European Central Bank and the Bank of Japan. Chicago Fed president Charles Evans says the Fed should be willing to accept “overshooting” the 2 percent target.
In January 2012, the Fed’s stated goal was to keep interest rates low through 2014. Now that 2014 is here, Evans’ “preference” is to keep interest rates at near zero until 2016. Fed chairwoman Janet Yellen’s position is that interest rates are to remain low for a “considerable time.”
That will be a difficult task if the Fed ends quantitative easing this month.
To manipulate interest rates, the Fed has at its disposal basically three tools: reserve requirements (which “controls” how much money banks can lend based on deposits), its re-discount rate (which is the rate at which the Fed lends money to banks and now is at .75 percent with next to no room to be lowered) and quantitative easing (which is when the Fed buys assets with freshly-printed money, thereby adding more money to the money supply.) Quantitative easing is the sledgehammer, the other two are pinpricks.
So, with the Fed supposedly ending QE this month, how will the Fed keep interest rates down?
The Fed will buy assets but not call it quantitative easing. It has no other tool. Big price inflation is on the way, well above 2 percent. Invest accordingly.