The Federal Reserve's high-stakes "roll of the dice" to keep deflation at bay, while also attempting to stimulate the American economy (and generate a wee bit of inflation) remains largely on track. Where we go from here remains the subject of intense debate as the Fed continues to operate in uncharted waters.
U.S. consumer prices (the CPI) rose 1.5 percent during 2010, down from the prior year's 2.7 percent rise and below the 2.5 percent average annual inflation increase during the period 2000-2009. Even so, the latest 12-month rise in November was just 1.1 percent.
In the eyes of the Fed, the more critical "core rate" of inflation — which excludes food and energy costs — rose only 0.8 percent during 2010, the smallest increase on record. The 0.8 percent core inflation rise last year compared to 1.8 percent increases during both 2008 and 2009. As some Fed critics would suggest, the "core" inflation measure is particularly important for those people who don't eat or drive.
Inflation or deflation?
The Fed continues to walk a tightrope between inflation and deflation. I would argue that during the past two years, the Fed has been more concerned about the latter. While declining prices may sound like a good thing to some, falling prices are soon followed by declining incomes.
History tells us that deflation is a more challenging scourge to deal with than is inflation. Just ask the Japanese, who dealt with eight consecutive years of deflation during the 1990s after that nation's asset and housing bubble burst … a nation that is now dealing with deflation again … a nation that saw the "lost decade" of the 1990s followed by much the same during the next decade.
The Fed, under the leadership of its Chair Ben Bernanke, continues to conduct unprecedented monetary policy, with initiatives during the past three years that are nowhere to be found in their operating manual. The latest of these initiatives is a $600,000,000,000 second round of purchases of U.S. Treasury securities, with the intent of providing stimulus to the American economy.
The Fed's first foray into the unknown was a massive purchase of $1,700,000,000,000 in U.S. Treasury securities and mortgage-backed securities between mid-2009 and early 2010. The Fed's desire to push long-term interest rates lower was ultimately successful. The program was referred to as "quantitative easing."
Thirty-year fixed-rate conventional mortgages eventually fell to 50-year lows near 4.20 percent. Various signs that the U.S. economic expansion was weakening by mid-year 2010 also led to the decline in long-term interest rates.
The second program, affectionately referred to as "quantitative easing 2," or QE2, has been less successful. Long-term interest rates have actually risen by 5/8 percent to 7/8 percent, depending on the type of security. In this case, rates rose because of investor anxiety about the longer-term inflationary implications of a second QE program, as well as brighter prospects for U.S. economic growth. Rumors of a third QE program later on are primarily met with investor concern at this time.
All that income!
One by-product of the Fed's aggressive bond purchase programs has been a major rise in the Fed's "earnings" from bond interest payments. What happens to these earnings? These funds are routinely funneled back to you and me (the taxpayer) via regular transfers to the U.S. Treasury Department. The Fed earned a record $80.9 billion during 2010, with $78.4 billion transferred to the U.S. Treasury. The transfer was up 70 percent from a year earlier.
The Fed has both supporters and critics regarding these enormous bond purchase programs. The Fed has essentially tripled the size of its balance sheet from roughly $800 billion to $2.4 trillion during the past 2-3 years — all with newly created money — used to purchase the securities.
- 2 homes, 3 other buildings damaged in...
- How new technology is reshaping pacemakers
- Why Pioneer Day is so important to Utahns
- Friction over Trump between GOP, Utah...
- Too many boaters not stopping for quagga...
- Jordan board calls for special bond election...
- Family of slain man who killed police K9...
- Crash launches engine 100 feet, but seat belt...
- Utah delegates finally stand and cheer... 93
- Utah GOP delegates finally fired up... 74
- Friction over Trump between GOP, Utah... 64
- The day after: Lee defends Cruz at GOP... 30
- Should mountain biking be allowed in... 28
- Prosecutor rails on DOJ handling of... 18
- Local government board fostered... 16
- 2 charged in attack on gay men;... 15