Tuesday, January 15, 2013

Who's Concerned?

As posted on the Federal Reserve Bank of Chicago website, in 1977, Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve as:
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

Fast forward to 2013, and the Fed has explicitly linked the timing of future interest rate increases to the rate of unemployment, and more recently, has expressed concern about the effects that early increases to interest rates could have on the Federal Government’s budget deficit targets. I’m concerned that the Fed isn’t concerned about price inflation.

Before the Fed started truly intervening in the financial economy in late 2008, their balance sheet and by extent the amount of “money” in the economy was around $800 billion, at the end of 2012 after four years of quantitative easing and special lending programs the Fed’s balance sheet was close to $3 trillion. Of all that new money, $1.5 trillion are bank reserves just sitting.

My finance background has exposed me to the idea the money does not like to sit still for very long. When the financial economy shifts from de-leveraging to investing, that money is going to be put in motion, and when it is, upward price-pressure will be exerted on the economy.

Inflation is not yet a concern, but I think that by the time it is, the horse would have already left the barn and closing the door would be fruitless pursuit.