Fed Chairman: We’ll Accelerate Our Policies Even If They Don’t Work

Federal Reserve Bank of Boston Chairman Eric S. Rosengren says he favored the Fed’s continuing QE3 policies until at least the unemployment numbers drop below 7.25%, even if those policies fail to stop another recession. Rosengren told an audience at Babson College “Beyond the U.S. situation, I would also point to Japan’s experience as instructive. As I have pointed out many times, despite having an expanded balance sheet for an extended period, the Japanese continue to struggle with a deflation problem rather than an inflation problem.”

The problem that Rosengren has is that Japan does not have a growing economy and they have not had one. They have had a stagnant economy and Ben Bernanke has admitted this. Bernanke noted:

Once at zero, the short-term interest rate could not be cut further, so our traditional policy tool for dealing with economic weakness was no longer available. Yet, with unemployment soaring, the economy and job market clearly needed more support. Central banks around the world found themselves in a similar predicament. We asked ourselves, “What do we do now?”

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To answer this question, we could draw on the experience of Japan, where short-term interest rates have been near zero for many years.

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In fact, there has been no significant economic growth for over two decades in Japan as a result of its model, which the Federal Reserve is currently following. Consequently it has racked up the greatest national government debt of any advanced economy, which is 230 percent of GDP and has experienced several credit rating downgrades. Sound familiar?

“The program has so far worked as expected,” Rosengren told the Boston-area college audience. “Our use of unconventional policy tools has led to lower longer-term interest rates; higher equity prices; and, in a peripheral by-product of lower U.S. rates, exchange-rate effects.”

However, he also indicated that the Fed didn’t have very much confidence in their policies and he said “We must acknowledge the uncertainty surrounding the efficacy of these policies, as well as our ability to execute a graceful exit from unconventional policy.”

There is no doubt that Rosengren is backing the current “Japanese model” at least until a certain point is attained. “My own personal assessment is that as long as inflation and inflation expectations are expected to remain well-behaved in the medium term, we should continue to forcefully pursue asset purchases at least until the national unemployment rate falls below 7.25 percent and then assess the situation.”

In a shocking statement the chairman said that if there was a shock to the system that they would accelerate the policy, even if it didn’t work. “Should the economy experience another shock — say from a U.S. “fiscal cliff” situation or a shock from abroad, then we could lengthen the period of purchases or increase the amounts (or both).”

Thomas Eddlem also points out,

Official Federal Reserve policy was reiterated on October 24 by the Federal Reserve Bank’s ruling Open Market Committee (FOMC), of which Rosengren is a member. “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability,” the FOMC stated, “the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” But FOMC Chairman Ben Bernanke has also set a goal of changing prices — by increasing the prices of commodities as measured by the Consumer Price Index by two percent per year. “The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.”

So how is seeking perpetually rising prices fulfilling it’s legal mandate of “price stability”? It isn’t, except in the expectations game.

The Open Market Committee had only one dissenting vote in pursuing QE3 — Jeffrey M. Lacker, chairman of the Federal Reserve’s Richmond branch — out of 13 total votes. Lacker argued in a speech posted on the Richmond Fed website that he was concerned about inflation and that “that labor market conditions have been held back by real impediments that are beyond the capacity of monetary policy to offset.” Lacker, while not making a free market argument for leaving markets to heal themselves, argued that excessive investment in the housing sector had displaced too many workers for economists to reasonably expect a quick recovery.

So I guess we should all begin to invest in real money (gold and silver) just to make sure that we at least do lost the value of the money we have, seeing that the Federal Reserve is hell bent on continuing to do the same thing over and over, expecting different results, even though they have a 20 year plus model that they admit is a stagnant economy. Can anyone say “Insanity?”

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