The chairman of the Federal Reserve, Jerome Powell, has spoken.  The Fed will take a different approach going forward with regard to inflation.

Powell’s definition of inflation is not increasing the money supply, which the Fed is doing often. Powell is talking about price inflation.  Even here, the Fed doesn’t use the commonly used CPI number.  It has its own metric that it uses called the PCE.

The Fed has had a goal of 2% inflation.  Again, this is in reference to price inflation and not the money supply.

It is ridiculous in the first place that this would be a goal.  It is devaluing the money that people hold by 2% per year.  When you compound this, it means that prices will double about every 36 years.  This is assuming that the Fed’s metric is accurate, which is not likely.

There is no reason that we need inflation.  In a free market economy with free money, we would most likely see mild price deflation over time.  You would have increased technology and production.  Instead, the Fed, as one of its mandates, tries to steal this benefit away from consumers.

Contrary to popular thinking, you don’t need an increasing money supply with increased production. Your money will simply buy more, and there is nothing wrong with this.  This is what has largely happened with electronics (computers, televisions, etc.) over the last few decades.  People still go out and buy these things.  They get the benefit of paying cheaper prices, or getting better products, or some combination of those two.

The FOMC Updates Its Goals Statement

With Powell’s speech, the FOMC officially updated its “statement on longer-run goals and monetary policy strategy”.

On price inflation, the statement reads as follows:

“On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it ‘seeks to achieve inflation that averages 2 percent over time.’  To this end, the revised statement states that ‘following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.’”

I take this to mean that the Fed is actually a little worried about price inflation for the first time in a while.  This is essentially what the Fed is saying now:

“Don’t worry if we blow past our 2 percent inflation target, even with the more understated PCE metric that we use.  We can easily go up to 3 or 4 percent inflation without slamming on the brakes. We can keep interest rates low and keep the funds flowing to Congress to fund the massive debt, even when prices are rising substantially more than what they already have been.”

The Fed has created about $3 trillion out of thin air recently.  It is unprecedented, and it isn’t going to stop.  It will temporarily flatten like it has over the last couple of months.  But the general trend will still be up for its balance sheet because the federal government is going to continue to run multi-trillion dollar deficits every year.

So when the Fed’s official measure of price inflation goes above 2%, it will point to its new long-term goals and say there is nothing to worry about.  They will insist that they can keep interest rates near zero and keep expanding the balance sheet.

Unemployment Concerns for Low-Income People?

The other big part of the new goals statement is a bit puzzling.  I won’t quote it here because it is just confusing, but it is in regards to unemployment.

According to this CNBC article, “While the shift appears to be a matter of verbiage, Powell said it is significant.”

Powell said, “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low – and moderate – income communities.  This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”

So I guess the Fed will now show its “appreciation” for a strong labor market.  What does this even mean?  There hasn’t been much appreciation for these workers since March when tens of millions of them were forced out of their jobs. Stock investors aren’t showing much appreciation because they continue to send stocks to all-time highs while many of these tens of millions of people remain unemployed.  In fact, the stock market it basically saying that these people are irrelevant.

It’s also interesting that Powell and the Fed would be stressing the importance of paying attention to low-income workers.  While the majority of people forced out of work would probably fall into this category, I would think that it would be middle and upper income people who are in a much tougher position right now if they lost a job.

First, take someone who was making $10 per hour working at an ice cream shop.  Let’s say that person was forced out of work because a governor or mayor deemed the business to be non-essential.  Now that worker is sitting at home collecting unemployment.  Up through the end of July, he was probably collecting around $900 per week.  That would be the state unemployment plus the $600 weekly bonus coming from the federal government and financed by the Fed. This unemployed person is making more than double what he was making before.  And when his unemployment dries up, it probably won’t be that difficult finding another job that pays $10 per hour.

Now let’s take someone who was making $100,000 per year and supporting a family.  That person loses his job.  Maybe he collects half his salary in unemployment up until the end of July when the amount gets reduced.  This person has a mortgage payment, and he has to provide food, clothing, health insurance, and other basic needs for his family. Plus, it won’t be that easy finding another job with a comparable salary.

But Powell and company want to show their appreciation for the guy who was scooping ice cream for $10 per hour.  I’m not saying that we shouldn’t be sympathetic for anyone who loses their job, but the young person (probably living with his parents) scooping ice cream who loses his job is in a much less difficult situation.

Of course, the Fed’s idea of showing “appreciation” means more manipulation of interest rates and the money supply.  That is really all it can do.  In the long run, this tends to hurt poorer people and people on fixed income, as the value of their money depreciates over time.

The only thing I can conclude from this Fed announcement is that we will continue to see a lot more monetary inflation.  That is all it has at this point, and it is just making up an excuse in advance for when it starts to show up more in consumer prices.  This is why I remain bullish on gold.