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Fed Mulls Raising Inflation Expectations to Boost Economy - Bloomberg

Federal Reserve policy makers may want Americans to expect inflation to accelerate in the future so they spend more of their money now.

Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed's Sept. 21 meeting released yesterday.

Some Fed officials are concerned that expectations of lower inflation will become self-fulfilling, damping demand by increasing borrowing costs in real terms, the minutes said. By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy. Chairman Ben S. Bernanke said in 2003 that Japan could beat deflation by using a "publicly announced, gradually rising price-level target."

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Oct 13th, 2010 at 04:02:21 PM EST
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FT.com / Columnists / Martin Wolf - Why America is going to win the global currency battle

The cries of pain now heard around the world, as markets push currencies up against the dollar, partly reflect the uneven impact of US policy. Still more, they reflect the stubborn unwillingness to accept the needed changes, with each capital recipient trying to deflect the unwanted adjustment elsewhere.

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world's surrender: the needed changes in nominal exchange rates and domestic policies around the world.

If you wish to understand how aggressive US policy might become, read a recent speech by William Dudley, president of the Federal Reserve Bank of New York. He notes that "in recent quarters the pace of growth has been disappointing even relative to our modest expectations at the start of the year". Behind this lies deleveraging by US households, in particular. So what can monetary policy do about it? His answer is that "very low interest rates can help smooth the adjustment process by supporting asset valuations, including making housing more affordable and by allowing some borrowers to reduce debt interest payments. Beyond this ... to the extent that monetary policy can `cut off the tail' of the distribution of potential adverse economic outcomes ... it can help encourage those households and businesses with money to spend to do so".

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Oct 13th, 2010 at 04:06:10 PM EST
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Funny how when the euro was going down it was the eurozone collapsing, and when the dollar is going down it's the US winning the currency wars...

Wind power
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 14th, 2010 at 03:28:47 AM EST
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By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy.

Wait - what? Inflation goes up, real purchasing power decreases, people borrow more from bankrupt banks that aren't lending to make up the gap, the economy grows?

Is this a plan or a comedy sketch?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 14th, 2010 at 08:10:20 AM EST
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Stagflation as a strategy for recovery!

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Oct 14th, 2010 at 08:11:44 AM EST
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Well, "everyone" was clamoring for the Fed "to do something"! But the lurking danger is that if they go too far in promoting "currency revulsion" as a way to get people to spend they could end up getting hyperinflation. That would solve the debt problem.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 14th, 2010 at 09:52:07 AM EST
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Hyperinflation? No, I don't think so.

BruceMcF:

A structural imbalance of the external accounts is part of the story in all the hyperinflationary episodes that I can bring to mind, with notable examples from the Confederate States of America in the 1860's through the Wiemar Republic, through Brazil in the 1970's, through Argentina at the turn of this century.
Unless the US' trade deficit is a structural imbalance large enough to trigger hyperinflation. If the US dollar collapsed, would the US stop importing, or would it continue to inflate its currency in a futile attempt to import more than it can possibly?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Oct 14th, 2010 at 10:08:05 AM EST
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The US has a major domestic economic crisis in that the entire finance industry is built on foundations of mortgage debt and property laws that are just about to get pulled out from under and the whole edifice may come crashing down.

I don't think we can predict what the US finance industry will look like at the end (although I'd be willing to bet Goldman sachs do well) but I really doubt they're gonna be in any position to protect the dollar at the end of it.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Thu Oct 14th, 2010 at 10:34:02 AM EST
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The "lurking danger" to which I alluded is largely that of the Fed going overboard with QE directed overseas. I can see that such a development could lead to a revulsion for the US$ by other countries, but I doubt that it would. But sometimes plans go astray.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 14th, 2010 at 11:50:55 AM EST
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Were oil to go back well over $100/bl., were China to retaliate for newly imposed import restrictions on their goods by dumping US$ reserves and were the Fed to persist in an externally directed QE strategy things might get out of hand. I don't think it is wise to totally discount such a possibility, especially if you want to guard against it.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 14th, 2010 at 11:55:54 AM EST
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oil would go to, say, $120 fairly mechanically. China would be forced to re-evaluate against the $, the American way of life would be very negotiable indeed... a real Marshall plan for alternative energy...

Where's the downside?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Fri Oct 15th, 2010 at 04:21:10 AM EST
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"Where's the downside?" -- likely will depend on where you live. In the USA the downside would be the consequences of allowing the existing financial sector to continue to squeeze the life out of the rest of the economy while we attempt to transition to a more sustainable energy regime. And German industry, especially, would not be too happy with the super strong euro, though no doubt many unemployed Germans would take great pride in its strength. So you might well see the ECB engaging in massive "easing" of its own. Hello competitive devaluations.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 15th, 2010 at 02:01:26 PM EST
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