CautiousInvestor

The Fed: Inflationistas, Par Excellence

With respect to monetary easing, effectiveness of this policy will depend upon where we are in the intertwined develpments of economic contraction and financial delevering. If we are are not late, then monetary easing should prevent economic collapse and and deflation. The Japanese were three years late and lost a decade. The two apparent unintended consequences: currency devaluation and inflation are more problematic. Thus far, markets are punishing the dollar and are likely to do so until there is some sense or understanding of how far this process is likely to continue. But to instill confidence in the equity markets, Bernanke has said he will stay the course and do everything necessary to forestall economic contraction and deflation. In my mind, this leaves room for the dollar to fall further while sewing seeds for higher inflation through higher import prices. The more important aspect of inflationary threats, though, hinges upon the ability of the Fed to "time" the point at which it should take the hot money out of the system and reduce the size of its balance sheet. Given its recent track record in timing the implementation of interest rate policy, I am not terribly optimistic about their ability to time the point at which they should contract the supply of money.