Fed Continues to Posture on Inflation

 |  Includes: TBT, TLT
by: The Manual of Ideas

Federal Reserve Vice Chairman Donald Kohn and New York Fed Bank President William Dudley are quoted as saying that they have virtually no worries about inflation. Writes Bloomberg,

Vice Chairman Donald Kohn, speaking yesterday in Nashville, Tennessee, said the Fed has loaned to "sound" borrowers and plans to disclose more about such credit. New York Fed Bank President William Dudley, speaking at the same conference, said he's "not worried at all that" a doubling in the central bank’s balance sheet to $2.19 trillion will spur inflation.

These are strong words from Fed officials, as "sound" may not be the first word a disinterested observer would choose to describe institutions that have recently been in need of Fed loans. And while it's nice to know that Dudley is "not worried at all," we wonder if he was at all worried about the housing market back in 2006.

One thing seems clear: When public officials sense a need to speak unequivocally on an issue that at best warrants equivocation, you know there is reason for concern. Usually, we hear this kind of talk from countries vulnerable to attacks on their currency or from desperate borrowers in need of putting on a good face to maintain the confidence of their lenders.

Bloomberg goes on to say:

The increased credit has provoked concerns prices will surge. Central bank officials are "dramatically underplaying the risks and liability side of the balance sheet," former St. Louis Fed President William Poole said in an interview at the conference.

"We are very vulnerable to an inflation explosion," said Poole, a senior economic adviser to Merk Investments LLC in Palo Alto, California.

When given a choice to believe a former government official who clearly knows the subject at hand, or a current government official with a vested interest in the success of current policy, we are inclined to choose the former. Certainly, when you have someone of Poole's stature making an unequivocal statement as to our vulnerability to accelerating inflation, one might expect Fed officials to address the concern a bit less glibly than to say they are "not worried at all."

Ironically, it was Kohn himself, perhaps speaking during a moment of unscripted freedom, who said earlier this month that "the trick will be unwinding this balance sheet in a timely way to avoid inflation."

Disclosure: No positions in TBT or TLT; short 30-Year Treasury Bond futures.