Santa Comes Early Via the Fed

A man with a white beard delivered an early Christmas present.  While he might like to think of himself as Santa Claus, unfortunately he is not.  He is Ben Bernanke.  They both like to deliver gifts, but Santa delivers toys that are made by elves.  Ben delivers stimulus at the expense of other people.

The FOMC released its statement from the December meeting.  Another round of monetary expansion has been announced.  This is on top of the announcement from September.  September's announcement was labeled as QE3 or QE Infinity.  I'm not sure what that makes this December announcement.  It can't really be QE Infinity plus 1.  Perhaps we could call it QE 3 and a half.  Or QE4.

The Fed will buy $45 billion per month in longer-term Treasury securities.  I assume this is net, because the statement also says that it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities.  So with $45 billion per month in government debt and $40 billion per month in mortgage-backed securities (announced in September), the Fed will be adding about $85 billion per month to its balance sheet.  If it does this for all of 2013, then the monetary base should go up another $1 trillion.  Just remember that it was less than $1 trillion before the fall of 2008.

While the monetary base has not really gone up yet since the September announcement, I assume that the Fed is not bluffing here.

The other thing in the statement that may have received even more attention is that the Fed will keep the federal funds rate at 0 to .25% as long as unemployment stays above 6.5%.  Or at least that is what most of the headline articles are saying.  But we have to read the fine print.

The statement says, "In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

With all of this monetary inflation, it is not hard to imagine seeing price inflation go up to 3 percent or more very quickly.  So, in other words, the statement regarding unemployment is meaningless.  Of course, it is meaningless anyway because the Fed isn't directly controlling the federal fund rate now anyway.  The commercial banks have massive excess reserves from the Fed's previous monetary inflation.  Unless the Fed drastically raises reserve requirements or forces the banks to lend, then the federal funds rate isn't going up anytime soon anyway.

While I don't think the comments about the federal funds rate are significant, I do think the announcement of more monetary inflation is significant.  It is a further misallocation of resources.  It is further damaging the economy and encouraging less savings.  We will all pay for this with a lower standard of living.  If you have been procrastinating in buying gold investments, I wouldn't procrastinate any more.