These press conferences with Federal Reserve Chairman Dr. Bernanke are becoming more amusing as of late:
“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation [..]” – Ben. S Bernanke
Really? On what basis of calculating inflation can one say with a straight face that over the last 30 years inflation has been tame or for that matter stable? Let’s take a look at the 30 year chart of the CRB index, which represents a broad view of commodities as priced in US dollars.
30 year CRB index
Clearly inflation is not under control. However, if the above chart is not enough to make one skeptical of the Fed’s latest remarks, then here’s a 30 year chart of the US dollar index, the currency in which prices are set for all the items we purchase in the United States (and other countries using or pegged to the US dollar).
30 year US dollar index
What one can gather from these charts is that we’re experiencing 30 years of a weakening dollar and extremely volatile commodities prices. Our central bank has the audacity to tell us that inflation is under control, and that in essence one should ignore gas prices, food prices and the prices of other goods which have surged over the last few decades (because all of the official inflation statistics ignore said prices).
I’ve always been a skeptic of the Fed’s press releases and these conferences, but this statement alone is enough to make one’s head spin when put in to context with the charts above. I believe instead that the Fed is claiming inflation is under control as a guise to give them the flexibility to perform more easing should the European contagion come home, or if our own sovereign debt issues begin to become more apparent to bond investors.
Without quantitative easing, twisting (and lots of shouting) our markets would likely have higher Treasury yields, lower equity prices — but people would be enjoying lower prices on food and energy. With the labor market stagnating and the overall economic picture still quite dismal, one has to wonder whether the Fed’s dual mandate of encouraging employment and maintaining stable prices has been abandoned in favor of recklessly supporting the financial system at large, and more specifically US Treasury bond and equity prices. It certainly seems to be the case when objective data is reviewed from a macroeconomic perspective.
