Multitasking is hard, even for the Federal Reserve. But by law — yet another horrible policy relic of the 1970s — it has to promote both “maximum employment” and “stable prices.” Some Republicans think it better that the Fed, like its European Central Bank counterpart, focus solely on prices getting neither too hot nor too cold. And an effort by Representative Mike Pence of Indiana and Senator Bob Corker of Tennessee is just the start of a GOP push to roll back Team Bernanke’s vast authority.
Ed Yardeni gives it a try:
Why is [Bill Dudley of the Federal Reserve] so sure that the Fed is so powerful when the CPI inflation rate is so close to zero despite the Fed’s extraordinary efforts to reflate the economy over the past few years? Could it be that while the Fed may be able to control inflation, it can’t do much to stop deflation? Macroeconomists like Mr. Dudley are convinced that inflation is always a monetary phenomenon. I agree that rapidly rising inflation is always a consequence of excessively easy monetary policy. Tight monetary policy, if tough enough, can always lower the inflation rate. However, the deflationary pressures of recent years can be attributed to lots of non-monetary developments including the IT revolution, the rebound in productivity growth, the proliferation of free trade following the end of the Cold War, and the emergence of low-wage emerging countries like China. There’s not much that the Fed can do to stop deflation caused by these forces. Indeed, the Fed shouldn’t even try, since such deflation tends to boost the purchasing power of consumers, which is a much better stimulus program than any reflationary policy promoted by the Fed.
It’s the return of the inflation tax, as Ed Yardeni rightfully notes:
The rational for another round of QE is to boost economic growth and to avert deflation. In other words, Fed officials would welcome a pickup in the inflation rate. The problem is that they are stoking an inflationary fire in the commodity pits. I doubt that’s the sort of inflation they are rooting for. Presumably, they want prices for consumer goods and services to rise moderately to stimulate producers to expand their capacity and to hire more workers. Higher commodity prices are a tax on consumers and producers and can have the opposite effect.
Ben Bernanke’s close escape from the Senate Banking Committee sets him up for a record number of final “no” votes on his renomination as Federal Reserve chairman. A second term is still overwhelmingly likely. But such unprecedented disapproval suggests Bernanke will be a 2010 campaign issue. That could make the Fed ever more susceptible to political pressure when it comes to tighten the easy money spigot.
Or so says Time. With the vast array of unprecedented Fed actions, it is hard to argue with the selection. But this might not be Bernanke’s last selection if inflation picks up. Remember, the award goes for the person who had the most impact, for good or ill.
Mike Darda of MKM Partners gives it his best shot:
If there were ever a crowded trade, long gold and shor the dollar certainly fits the bill (no pun intended). Indeed, zero percent short rates and huge deficits as far as the eye can see have been important tailwinds for the yellow metal. And they remain in place. However, gold appears expensive relative to industrial commodities and has risen much more than bond market inflation expectations or the money stock over the course of the last year (the monetary base has exploded higher, but M2 growth has been more modest).
A classic from David Goldman:
The crystal-meth monetary policy at the Fed makes everyone feel better, until they don’t. The nonstop rise in the price of dollar hedges tells us that it can’t last forever. Large balance sheets attached to the Fed’s money pump can show profits, and the price of spread assets (as PIMCO’s Bill Gross keeps emphasizing) is stupid rich. But at the capillary level, through, the economy is dying and gangrene is setting in. … It isn’t just the 17.5% broad-measure unemployment number that we should worry about, but the massacre of smaller businesses, who are concentrated in the most vulnerable sectors: real estate, construction, and retail. Retail sales may get a temporary shot in the arm from cash for clunkers, and a combination of tax credits and (de facto) subsidized mortgage rates may hold up the bottom of the housing market for a short time. But today’s data show how fragile these matters are.