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Guest Post: Fed Trapped By Inflation

Submitted by Tyler Durden on 11/01/2011 18:33 -0400

Submitted by Lance Roberts of Street Talk Advisors

Fed Trapped By Inflation

There will be NO announcement of QE 3 tomorrow. Why? Because the Fed has trapped itself into a corner. The first two rounds of Quantitative Easing (QE1 and 2) were viable for the Fed as inflation was running at deflationary levels in 2009 and at the bottom of their target range of 1-3% in 2010.

In both instances the implementation of asset purchase programs, which immediately juiced liquidity in the financial markets, had an immediate and pronounced effect on the level of inflation.

Today, with inflation currently approaching 4% on a year-over-year basis the Fed is not only outside its inflation mandate of 1-3% but any further cost pressures on the consumer is going to drive the economy into a recession. As we showed recently in our post on 3rd quarter GDP with food and energy consumer more than 23% of wages and salaries there is very little wiggle room for the average American.

Without access to credit, declining incomes on a year-over-year basis and uncertainty about employment there is tremendous strain on the consumer to make ends meet. The Fed knows this. They also know that without help from somewhere the economy is in trouble. The hope is that they can "talk" the markets along.

Therefore, expect no announcement of QE 3 tomorrow but lots of talk about policy tools, potential for further action and another punt to current Administration. However, with that there is a bigger problem brewing, and one that has been set aside due to the issues with Greece, the "Super Committee" only has 22 days left to announce the spending reduction plans before the automatic cuts take hold. This won't be good.

Unfortunately for Ben and the Fed they are trapped between the need to "do something" to boost the financial markets and support the economy but are constrained by their mandates to keep inflationary pressures under control. There is no help coming from a deeply divided Administration that can find no middle ground to compromise on and the automatic spending cuts are going to sap a portion of the 23% of personal incomes that are made up by government transfers. The consumer is tapped out, the economy is much weaker than the headline numbers suggest and without liquidity assistance from the Fed you can expect the recession to take hold in 2012.

However, we might get surprised by the Fed as they have done it before. The real question is even if they do something will it be enough to offset the damage that has already been done.

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Tue, 11/01/2011 - 22:10 | 1835301 Yen Cross

The , " FED is caught in GUMBY-LAND""!! < I can't wait to hear the Chair Satan talk tomorrow!

Tue, 11/01/2011 - 22:20 | 1835337 Fozzy Slippers

Jubilee. Purge the system is the only way. Else you congress critters may as well go hide in your bunkers.

Just remeber. You won't ever be able to come back out again.

Morlocks.

Tue, 11/01/2011 - 22:29 | 1835361 blindman

it is not rational to expect a fiat, debt based money system
to be a strong currency. not rational, not possible. the idea
contradicts the nature of the system. ( euro dream ). and
the fed petro dollar. while crime and fraud in the euro zone
have made up for the lost time of being a less mature currency
than the petro dollar which also enjoys the fraud and crime of
cds forgery, the entwined systems have only one possible future.
devaluation and greater transgressions of anything humans might
call legal or lawful. that is because the cat of fraud and cheating
is out of the bag and has procreated and now the feral beasts
run the show. there is no trapping them or redeeming their ways.
they will bring the roof down on themselves with the destruction
of the thing they love most. easy money. that is irony larry.

Tue, 11/01/2011 - 22:29 | 1835364 strangeglove

Add in Health care and education and what have we got?

Tue, 11/01/2011 - 23:54 | 1835594 JR

Deflation?

Tue, 11/01/2011 - 22:43 | 1835415 EZYJET PILOT

We all know he will print eventually and so do the banks, that is why the stock market stays afloat. These FOMC meetings are just a stage show, everyone knows he will print to save the banks when he needs to, it's almost like QE is surrounding us all the time, it's a virtual QE surrounding us in the ether. This allows banks to bet without thought of consequences.

Tue, 11/01/2011 - 23:40 | 1835558 rosiescenario

From the limited reading I have done on Ben it appears that his greatest fear is deflation, for once it sets in the Feds are powerless to stop it. Ben does not want to give up his power so he will make sure inflation is alive and well.

During deflation with prices going down people put off purchases and they do not borrow money to make them, when they must finally do so. Consumer durables are repaired rather than thrown in land fills. Cars are made to last far longer....who wants to spend $20K on a car when one knows that later in the year the same one can be had for $18K? There is an entirely different psychology at work during deflationary periods....it is to consume as little as possible and delay purchases as long as posible...and do not borrow, because you will be repaying the debt with more valuable dollars.

So all the basic industries suffer and unemployment rises, except for those sectors (such as ag) which are producing necessities which must be purchased on a regular basis.

Wed, 11/02/2011 - 00:49 | 1835712 Elmer Fudd