Today was a first. Ben Bernanke became the first chairman of the Federal Reserve to hold a press conference directly following a Fed monetary policy decision. Perhaps Bernanke is trying to make the Fed more transparent. Perhaps more likely, Bernanke is feeling the heat from Ron Paul and his following of Fed critics.
The Fed announced that it was maintaining the federal funds rate low for an “extended period”. As Gary North has pointed out, the Fed isn’t really maintaining this rate. The federal funds rate is the rate at which banks borrow from each other for overnight loans to settle accounts. With most of the new money created by the Fed going into excess reserves at banks, most banks have no need to borrow money overnight. They have plenty of money of their own.
Bernanke also acknowledged that the Fed would continue with its QE2 program (money creation) through the end of June as planned. While he hinted that it would not continue after that, he also hasn’t ruled it out. Bernanke and the Fed are leaving their options open. I really don’t think they know what to do at this point. Bernanke is acknowledging that some price inflation is present now and he is also acknowledging that the economy has weak spots.
The reason the Fed is acting so cautious with its words and actions (not that tripling the monetary base has been a cautious action) is that these people really don’t know what to do. The Fed is walking on a tightrope. If the Fed keeps hiking up the monetary base, price inflation could quickly follow the monetary inflation. With just today’s announcement, the stock market, oil, gold, and silver all shot up. Gas is already expensive and getting more so by the day and food is probably not far behind. The Fed really is risking a run on the dollar.
On the other hand, the Fed could pull back and stop its money creation. It could even withdraw some of its previous “stimulus” money. If the Fed does this, it risks a hard and deep recession and this is with the official unemployment rate near 10% already. We should actually hope that the Fed chooses this latter course as it will be much better for the long run.
I think the most likely scenario is that we will see a lot of ups and downs and we will eventually see recession and significant price inflation at the same time, much like we saw in the 1970’s. If we can get out of this like the 70’s, we would be very lucky at this point.
For now, I expect heavy volatility and I expect the uptrend to remain for oil, gold, and silver. I’m a little more unsure about the stock market. These really are unique times that we live in. Let us hope that we don’t go to hyperinflation as that would truly be disastrous. Let’s hope that we can slowly phase out the Fed and start using money like gold or silver as determined by a free market.