Monday, February 28, 2011

NY Fed Chief: Everything Is Fine, Fed Is Not Responsible For #Egypt, #Libya, #Tunisia,

#Yemen, #Bahrain, #Oman, #Algeria, #North Korea, #Vietnam, for that matter anywhere (like here in the US) where the food and energy prices have been going up sharply. Why, it's the demand growth from the emerging markets that's been pushing up the prices! Growth! Isn't that good?

William Dudley, former Goldman Sachs exec (he was the chief economist) and current chief of the Federal Reserve Bank of New York, spoke this morning to the New York University Stern School of Business. As almost all Fed chiefs do (with the exception of Hoenig, maybe), he carefully hedges his position but he was put in there at the head of the NY Fed to help out Ben Bernank in FOMC. So what would you expect from him but the defense of the Fed policies?

I read his speech, and I kept scratching my head - am I living in the same space-time continuum as he? Is he right, and is everything OK? All I know for myself is that I've been long priced out of Whole Foods Market, and am about to be priced out even from Safeway.

Some points from his speech:

  • The Fed has successfully planted the "inflation expectations" among businesses and households through quantitative easing and zero-rate policy, but the inflation expectations remain "well-anchored" - meaning they are not very high, slightly above 2%, as seen in various surveys. So they are healthy signs that the economy is growing.

  • The only way that the (price) inflation goes much higher in the next year or two is if these "inflation expectations" become "unanchored" - meaning "if there were a loss of confidence in the ability and/or willingness of the Federal Reserve to tighten monetary policy in a timely way in order to keep inflation in check". But don't worry that's not going to happen as long as the Fed "communicates" effectively.

  • The bloated [well, he didn't say bloated, but how else would you call it?] balance sheet of the Federal Reserve is not a problem at all, because the Fed has tools to shrink it if necessary - for example by raising the interest paid on the excess reserves.

  • And oh by the way the Fed is not likely to raise the short-term interest rate any time soon.

In short, print print print, spin spin spin.

People in north Africa, Middle East, and Asia, when you see (as you've been seeing) the price of food goes up, think the US Federal Reserve. And give thanks to them for the "growth" that your country is experiencing. The only thing growing is the amount of fiat currency chasing pretty much the same amount of goods, causing the price of goods to go up. Simple math.

But the Fed economists like Dudley hate simple math.


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