Current Fed Policy - For how long ?

[Eric Stoner]

I have re-written and edited this at least three times to avoid the "politics ban". According to Bernanke, the Fed will not increase interest rates until 2014 at the earliest. Banks are paying virtually zero on savings accounts and their returns on loans are getting squeezed. Remember that banks have to allow for "non-performing" loans. Then we add in yet another Obama program to "help borrowers" plus the burst dam of foreclosures flooding into the legal system.

I hope I am wrong but this is a recipe for disaster. It seems designed or intended to clobber the dollar and ignite inflation. It has to be because as much as I disagree with their policy, I can't believe the Open Market Committee is actually composed of the mentally retarded. I can never remember a time when this much cheap money was sloshing around the economy for so long a time. Not even Arthur Burns ( I guess I can't call him the " Village Idiot" anymore lol ) was this loose. Not on his worst day and there were many.

Maybe I am missing something but we've had three periods of genuine extended prosperity with low inflation in my lifetime: 1963 to 1969 ; 1983 to 1991 and 1997 to 2007. (Some argue that the latter two periods were really one two-decade long run.) In those times we had a strong dollar and government spending as a share of GDP well below 20%. We had economic growth with relatively low inflation and good employment numbers. Except of course, when Bush The Dumber let the dollar decline which some argue was a root cause ( A Cause , not THE cause ) of the Financial Crisis and resulting Great Recession.

[Melonie]

here's an answer from Graham Summers over at Phoenix Capital


(snip)The Fed Cannot Act Without a Crisis... And One is Coming

Well the Fed disappointed as I stated it would. How anyone could be surprised by this is beyond me. The Fed was admitting that the consequences of QE rendered it less "attractive" as an option as far back as May 2011.

Moreover, the last six months have shown the Fed to be relying heavily on verbal intervention rather than direct monetary intervention. Every FOMC meeting (and any time the market takes a dive) some Fed official steps forward and promises that the Fed stands ready to help if needed.

The reasons for this are three fold:

1) Why bother with monetary intervention when you can get the same effect from verbal intervention?

2) The Fed is too politically toxic now to simply unveil a massive new monetary scheme without a Crisis hitting first.

3) The Fed is well aware of the consequences of QE (higher food and gas prices) and while it focuses on CPI as the measure of inflation, the political pressure engendered by higher costs of living are certainly on the Fed's radar.

In plain terms, the bar for more QE is set much, much higher than the vast majority of analysts realize. The reason is that the Fed can no longer simply prime up the printing presses if the economy takes a dip.

We've seen this clearly in the last two Fed FOMC statements, in which the Fed downgraded its view of the US economy to posting "modest growth" (Fed speak for next to none) and then offered a "highly accommodative stance," (Fed speak for "we're out of ideas but can always hit the 'print' button") as way of dealing with this.

Let's cut the BS here. The Fed has maintained a more than highly accommodative stance for three years now and U-16 unemployment, food stamp usage, home prices, and virtually every other economic metric indicate that they've done little to boost the US economy in any meaningful way. QE has and always will be about boosting asset prices in the hope that the Fed can stimulate a recovery by getting the S&P 500 to some level.

The only problem with this is that people don't engage in financial speculation to pay their bills. Incomes have and always will be the single most important metric for gauging consumer strength. And as the below chart from Morgan Stanley shows, the Fed's policies of the last few years have done nothing to boost incomes (unless you work on Wall Street).

This chart goes a long way towards explaining the current political environment in which the Fed is about as popular as the bubonic plague. If you read headlines stating "Fed Gave Trillions to Banks" and you've been laid off and are living off food stamps, your blood pressure might tend to rise.

And you might tend to vote based on that.

Folks, the reality is that the Fed's hands are tied. That's why they keep issuing these innocuous policies (keeping interest rates low until 2056 or some insane future date) without actually doing anything. They know that additional easing means inflation soaring, which makes the Fed that much more a target of popular outrage.

So if you're counting on the Fed propping the market up throughout 2012 as it did in 2011, you may be in for a rude awakening in the coming months. Every day that we get closer to the 2012 Presidential election, the bar for more QE goes higher and higher. Truly unless we get some kind of major Crisis, the Fed won't be doing much of anything.

So let the traders run their "end of the month" games this week. But don't be surprised if stocks start to take a dive in early February.(snip)


As far as the FED versus the SW 'politics ban', I'll continue to hide behind the official pablum that the FED is an 'independent body' that is free of outside pressures from US politicians, from wall st. banks, etc. Thus criticism of the FED, by the official definition, cannot be political !!! ( yeah yeah I know but that's what they claim !! )

The major take-aways from Dr. Summers are #1 that QE money printing helps commodity speculators ... by forcing 'hot money' investors toward investments having 'real value' as opposed to 'paper' value. It also helps wall st. banks, since they effectively get paid interest income by the FED in exchange for depositing the FED's newly printed US dollars at zero risk ( instead of lending them out at high risk ! ). Unfortunately, for the proverbial Joe Sixpack, he sees zero investment gains other than in his 'untouchable' 401k retirement fund, but sees a whole lot of increase in the US dollar denominated prices he must pay for gasoline, food, and everything else involving world market commodities. Of course, Joe Sixpack IS a registered voter !

The other major take-away from Dr. Summers is #2 that today there is a total disconnect between price inflation and wage inflation. With a 'new normal' for the US unemployment rate, the typical past result of employees facing rising costs of living successfully pressuring employers for wage increases now falls on 'deaf ears'. Thus the past paradigm that FED money printing would catalyze an economic recovery no longer applies. Instead, today, FED money printing primarily benefits the 'investor' class, and directly hurts Joe Sixpack who must deal with rising gasoline, food and other prices versus a stagnant paycheck.


In regard to your other point about Obama's proposed mortgage bailout plan, from a factual standpoint it boils down to the 'closing out' of mortgage debt that is held by the private sector, and the substitution of newly written mortgage debt that is held by Fannie and Freddie i.e. the US Taxpayer. This arguably amounts to a double barrelled bailout for wall st., since they get to unload more risky mortgage debt onto the US taxpayer, plus they also receive newly printed US dollars in exchange for the risky mortgage debt that will earn risk free interest from the FED ( as opposed to creating additional losses net of foreclosures / distressed sales / bankruptcies ).

[safado]

I am not usually into conspiracy theories but I am stating to think that Bernanke and his minions on the FOMC are long physical gold and are trying their best to pump up gold while trying not to make the general population suspicious.

[Melonie]

Bernanke et all are arguably SCARED TO DEATH about rising gold prices ... and even MORE scared about any other country resorting to a gold backed currency ( i.e. the Islamic Gold Dinar to name one possibility ).

http://www.theundergroundinvestor.co...silver-prices/

(snip)"Did bankers use the MF Global bankruptcy to suppress gold and silver prices and create the panicked appearance of collapsing precious metals to give themselves additional precious time to delay the crash of the Euro and the US Dollar? As crazy as this sounds, a closer investigation of some key data seems to imply this possibility. Though bankers claim that they created futures markets to provide a mechanism for commodity producers to hedge against volatile market prices, I have never bought the kool-aid the bankers were selling in this explanation for the rationale behind their creation of futures markets. Given that today, futures and spot prices for gold and silver in the short-term are entirely set by banker manipulation of the supply and demand for paper derivatives that often have no backing of any physical metal (snip)

[bucket2]

"As far as the FED versus the SW 'politics ban', I'll continue to hide behind the official pablum that the FED is an 'independent body' that is free of outside pressures from US politicians, from wall st. banks, etc. Thus criticism of the FED, by the official definition, cannot be political !!! ( yeah yeah I know but that's what they claim !! )"

LOL.

[mikef]

This is all about helping the TBTF banks...... BTW, how is it that not only do we STILL have TBTF banks?...... They are bigger than ever...... Borrow from the Fed at almost nothing..... Buy U.S. Treasuries at sub 3%.... Repeat.

Now all Bernanke has done is export inflation to other countries.... As these countries (mostly China) allow their currency to appreciate..... Then we will see inflation in imported goods..... We already see plenty in food, energy, and utilities.

[Vamp]

If he is saying directly not til 2014 he is setting up a world of hurt for alot of people but the big players.

i know one person who has made 500k betting on the fact interest rates wouldnt raise this past year. That one investment instantly made his portfolio into a million dollars. So the bigger players are going to make money off this coming and going in a million different ways. All the while the rest of us will pay for it in inflation and others im sure we havent thought of yet.

[Melonie]

So the bigger players are going to make money off this coming and going in a million different ways. All the while the rest of us will pay for it in inflation and others im sure we havent thought of yet.

This is an extremely important point. Again trying to skirt the edge of the SW 'politics ban', it's a simple fact that the vast majority of Americans still view economics from a US dollar-centric focal point. This leaves most Americans oblivious to the fact that the US dollar's 'purchashing power' is now and has been since 1913 ( and especially since 1971 ) a huge 'variable'. This also leaves most Americans unaware that any real measure of 'purchasing power' involves real commodities ... gold, oil, beef, farmland etc. ... and not a pile of green paper. Thus most Americans are 'happy' when they see their US dollar denominated savings and investments gain 5% in a year, while failing to make the linked observation that the cost of their food, energy, and other 'necessities' have increased by 10% over the same year - which actually left them 5% worse off than they started out !!!

However, this is a good thing from the viewpoint of certain circles. If most Americans were to truly absorb the implications that the objectively measured 'cost' of their food, energy and other 'essentials' is actually somewhat constant, while the 'value' of their US dollar denominated paychecks and their US dollar denominated savings is in fact shrinking, another Andrew Jackson moment could easily develop.

"""Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the [ precursor to the FED national - sic ] bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves and I intend to rout you."
- President Andrew Jackson""

[Melonie]

^^^ and as to the coming 'world of hurt' ... check out recent events in Italy ... from http://lewrockwell.com/orig13/jousse1.1.1.html


(snip)"This past week has been a very turbulent time for Italy. And it wasn't just the grounding of the Concordia cruise ship by a playboy captain; but the grounding of the country by Euro-technocrat usurper Darth Monti, trying to impress his Keynesian buddies with his latest attempts to ‘Save Italy’!

This week saw the launch of a popular uprising in Sicily, by a group known as the ‘Movimento dei Forconi’ or ‘Pitchfork Movement’. This is not an uprising of self absorbed youth who want more government handouts; but of producers who are being pushed into poverty by government taxes and regulation. The organizers are middle aged and older; this is significant, as most power and wealth is held by this generation and they have now drawn a line in the sand.

On the 16th of January these protesters began "Operazione Vespri Siciliani", a blockade of the Island of Sicily. Within two days the transportation of all goods was stopped. Over the next week, nothing entered or exited Sicily. This was no mean feat given that Sicily is not a small Island; it has a population of over five million people and a surface area of 25,711 km2.

These are some of their demands:

The arrest of all corrupt politicians.
To reduce the number of parliamentarians.
To remove the provincial bureaucracy, as most of these politicians have been there for over forty years.
To drastically cut the salaries and privileges of parliamentarians and senators.
To restrict politicians two only two terms in office

Not one of Darth Monti’s “austerity” measures has touched the political caste; in fact in classic Italian style, the press has dug up some very dirty scandals concerning two of his fellow tax-feeders.

The trigger for these events was the vampire state sinking it’s fangs deeper into the already hampered Italian economy; a vicious tax was added to petrol, diesel and other energy sources in December."(snip)


Tying this back to earlier comments, the take-away is that central bank monetary policies of late are highly beneficial to 'speculators' ... which are mostly comprised of the 'rich' and 'powerful'. They are also somewhat beneficial to the 'poor' ... who have little or no savings to face devaluation losses, and who pay little or no taxes. But they are increasingly burdensome in regard to 'producers' ... i.e. the middle class.

[bucket2]

^^
2012 is going to be a trip. Get ready.

Movimento dei Forconi doesn't have organizers and neither does OWS, the Arab Spring or the Tea Party. Trying to figure out who's behind these movements would be as frustrating as trying to "follow the money" as they say. It's impossible.
Let the games begin.

[bucket2]

^^^
I guess I have to tie this into the Fed to keep it non-political. Ok, I love the Fed and the assortment of protestors too.
All you need is love....

Can I say that?

[Melonie]

^^^ I would only remind you of a long time professional investor's adage ... which has held true recently as well ... 'DON'T FIGHT THE FED"

[Eric Stoner]

^^^ That's right. The best one can do is orient one's investments and money decisions accordingly.

It has been suggested by a number of respected analysts that a big reason the Fed will sit on interest rates is to protect its balance sheet.
At present the Fed is holding some $ 3 TRILLION in Federal debt. Debt that was issued at VERY low rates. If they let rates rise, the value of that paper goes way down. They could try to sell it but who'd want to buy it ?

[Melonie]

^^^ US Treasury bonds are a 'minor' worry for the FED ! For better or worse, the FED is also holding an arguable 7 trillion worth of 'distressed' mortgage debt it 'bought' at full face value to prop up the big wall street financial houses ( i.e. the Maiden Lane's plus other 'hiding places' ). Indeed low interest rates are necessary to help this 'distressed' mortgage debt to retain whatever limited value it may actually have. And those trillions don't include 'distressed' assets from Dexia, Barclays and other european banks that the FED has acquired as a result of 'stealth' bailout efforts for the EuroZone.

As to your other comment, the 'gold foil hat' crowd has moved from referring to the FED as 'buyer of last resort' to 'buyer of ONLY resort'. Of course, the FED does have a 'printing press', so that technically speaking it can never run short of money ! But tomorrow's US dollars may wind up with much lower 'purchasing power' than today's dollars ... which already have much lower 'purchasing power' than yesterday's dollars.

[eagle2]

This is an extremely important point. Again trying to skirt the edge of the SW 'politics ban', it's a simple fact that the vast majority of Americans still view economics from a US dollar-centric focal point. This leaves most Americans oblivious to the fact that the US dollar's 'purchashing power' is now and has been since 1913 ( and especially since 1971 ) a huge 'variable'. This also leaves most Americans unaware that any real measure of 'purchasing power' involves real commodities ... gold, oil, beef, farmland etc. ... and not a pile of green paper. Thus most Americans are 'happy' when they see their US dollar denominated savings and investments gain 5% in a year, while failing to make the linked observation that the cost of their food, energy, and other 'necessities' have increased by 10% over the same year - which actually left them 5% worse off than they started out !!!

You're making stuff up again. The price of natural gas has fallen dramatically over the past year, which means Americans are paying a lot less for heat, and most likely for electricity coming from natural gas burning plants. As someone who actual lives in the US, I haven't seen any noticeable increase in the price I pay for food.

The biggest expense for most Americans is housing, and the cost of housing has not been increasing in most areas. Also, lower interest rates mean Americans are paying much less in mortgage interest, if they bought a home recently, or refinanced with lower rates.

[eagle2]

^^^ That's right. The best one can do is orient one's investments and money decisions accordingly.

It has been suggested by a number of respected analysts that a big reason the Fed will sit on interest rates is to protect its balance sheet.
At present the Fed is holding some $ 3 TRILLION in Federal debt. Debt that was issued at VERY low rates. If they let rates rise, the value of that paper goes way down. They could try to sell it but who'd want to buy it ?

The US government is not having any problems getting people to buy our debt.

[Vamp]

You're making stuff up again. The price of natural gas has fallen dramatically over the past year, which means Americans are paying a lot less for heat, and most likely for electricity coming from natural gas burning plants. As someone who actual lives in the US, I haven't seen any noticeable increase in the price I pay for food.

The biggest expense for most Americans is housing, and the cost of housing has not been increasing in most areas. Also, lower interest rates mean Americans are paying much less in mortgage interest, if they bought a home recently, or refinanced with lower rates.

I dont always agree with Melonie... but on this point I do.

First of all we are talking about a trajectory towards 2014; not the present day. With interest rates practically guaranteed not to move, the economy not showing strong growth, still unstable housing market, and Europe up in the air; it is also guaranteed inflation.

The slump in natural gas is due to increased production without much demand because of a mild winter. They will cut back production. Gas prices have stabilized. Yet any conflict in the mid-east or economic changes in Europe could change that fact fast.

I have no idea where you live, but I have noticed an increase in food prices this past year alone. This article was from March 2011
"Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose."
http://www.cbsnews.com/stories/2011/...20043737.shtml

Not to mention the fact the Fed keeps pumping out dollars as if it was toilet paper.

When Melonie talks about 5% interest, it is not mortgage rates. She is talking about savings rates. Actually you are lucky to find a 3% APR interest rate on a CD or Savings account.

So conservatively, if you are making less then 3% on savings (if you are lucky enough to have money to save), average inflation is 3%, so even if there was a jump in inflation by 3%= 6% .... you are actually loosing. That is the point. The average American does not see this big picture.

All the while the big players are going to be making HUGE profits by betting against the consumer, betting against interest rate hikes, and maintaining their status to compensate for the inflation.

[Melonie]

The price of natural gas has fallen dramatically over the past year, which means Americans are paying a lot less for heat, and most likely for electricity coming from natural gas burning plants

That's an exception to the rule. It does not apply to oil, gasoline, coal etc. It has been caused by a combination of a warm winter, closures of large American manufacturers who had been large natural gas users, new shale gas fracking well production coming online in states which have allowed fracking, but most of all a lack of an export market route thanks to environmental protests restricting the construction of new pipelines and LNG export terminals. Right now European LNG prices are nearly 3 times natgas prices in the Eastern US. Europeans would love to purchase huge amounts of US LNG ... which would reduce the temporary supply vs demand imbalance and significantly increase US natgas price levels. But, for better or worse, the US pipelines and LNG shipping terminals necessary to do so in the volumes the Europeans would require don't exist. Thus, unlike oil, gasoline or coal, US nat gas is 'trapped' in a limited regional market with increasing supply and decreasing demand - which has depressed the regional price versus typical price levels for ( liquified ) nat gas in other parts of the world.

As to food prices, the next time you're in the supermarket you might check out the shrinking package sizes being sold at the same price. The USDA even officially concedes that food prices are rising ... see http://latimesblogs.latimes.com/mone...says-usda.html . And of course MacDonalds is floating their third price increase in the past year.

But all of those issues are beside the point. Your observation that 'The US government is not having any problems getting people to buy our debt' is technically incorrect. Individual investors are not buying US treasury bonds in volume. There is one exception of course, which is the increased purchases of federal and state tax exempt muni bonds by 'rich' residents of high tax US states ... for obvious reasons that have little to do with any desire to help fund federal and state gov't spending.

In point of fact, the major buyers of US Gov't bonds are the 'primary dealer' wall st. banks. And the reason that they continue to 'buy' US Gov't bonds is that the FED allows them to 'trade' much riskier assets in 'exchange' ( typically at full face value ). The FED also loans them the new money to buy new US Gov't debt ( which pays ~3% interest to the owner ) at the fed funds rate of ~0% ... which provides the wall st. banks with a guaranteed risk free income source. Or viewed another way, the FED is 'paying' the primarily dealer banks to purchase new US gov't debt !

There is also a ( temporary ) demand for US Gov't bonds as a 'safe harbor' investment by Europeans fearing Greek banking / Euro currency problems. One prominent commentator explained this as the 'US dollar being a less dirty shirt'

However, traditional US Gov't bond purchases by Japan, by China etc. have been greatly reduced of late ... as the arguable 'smart money' seeks to gradually diversify its foreign exchange reserves away from the US dollar. Also, certain export countries like Brazil, Iran etc. are reducing the use of the US dollar as their official exchange currency ... which in turn reduces the need for importing countries to hold US dollar reserves ( = to purchase US Treasury bonds ) in order to trade with these exporting countries.

So conservatively, if you are making less then 3% on savings (if you are lucky enough to have money to save), average inflation is 3%, so even if there was a jump in inflation by 3%= 6% .... you are actually loosing. That is the point. The average American does not see this big picture.

Exactly ! Thank you for pointing this out more clearly ! However, you also left out the fact that Americans will wind up losing 1% of the 3% interest being earned on savings / CD's etc. to US income taxes. This means that even under conditions where 3% price inflation is exactly balanced by 3% CD interest rates, the American CD buyer still 'loses'. With the current situation of >3% price increases versus <1% interest rates being paid on savings, the 'losses' should be obvious. However, as you so correctly point out, US dollar centric Americans usually miss this observation entirely.

[mikef]

The US government is not having any problems getting people to buy our debt.

People is stretching it..... Human maybe.

[Eric Stoner]

You're making stuff up again. The price of natural gas has fallen dramatically over the past year, which means Americans are paying a lot less for heat, and most likely for electricity coming from natural gas burning plants. As someone who actual lives in the US, I haven't seen any noticeable increase in the price I pay for food.

The biggest expense for most Americans is housing, and the cost of housing has not been increasing in most areas. Also, lower interest rates mean Americans are paying much less in mortgage interest, if they bought a home recently, or refinanced with lower rates.

WHERE is this magical bubble you have found to reside in ? Where nothing ever goes up in price ? Where Fed policy has no effect ?

My gas bill has gone UP. On LOWER use than the same time last year ; thanks to an unusally mild winter. So far.

When is the last time you bought meat ? O.J. ? Coffee ? Supermarket prices have been going UP for the last few years.

[eagle2]

The price of natural gas has fallen from $152 per thousand cubic meters of gas to $113 over the past year.

http://www.indexmundi.com/commoditie...-gas&months=12

[eagle2]

When is the last time you bought meat ? O.J. ? Coffee ? Supermarket prices have been going UP for the last few years.

I don't buy meat at the store that often. When I went to McDonalds for an Angus Burger meal yesterday, I paid about $7.50 for it, the same as I've been paying for as long as I can remember. When I went to Subway today for a 12' chicken sub, I paid about $7.80, the same price I've been paying for as long as I can remember. When I bought a gallon of milk, it was about $3.60, which isn't too different from what I usually pay. I stopped buying "natural" orange juice after I read about what goes into it.

[eagle2]

That's an exception to the rule. It does not apply to oil, gasoline, coal etc. It has been caused by a combination of a warm winter, closures of large American manufacturers who had been large natural gas users, new shale gas fracking well production coming online in states which have allowed fracking, but most of all a lack of an export market route thanks to environmental protests restricting the construction of new pipelines and LNG export terminals.

Industrial production has increased over the past year.

http://www.federalreserve.gov/releases/g17/current/

Industrial production increased 0.4 percent in December after having fallen 0.3 percent in November. For the fourth quarter as a whole, industrial production rose at an annual rate of 3.1 percent, its 10th consecutive quarterly gain.

As to food prices, the next time you're in the supermarket you might check out the shrinking package sizes being sold at the same price. The USDA even officially concedes that food prices are rising ... see http://latimesblogs.latimes.com/mone...says-usda.html . And of course MacDonalds is floating their third price increase in the past year.

Your article states that the estimated increase for 2011 were 3.25% to 3.75% and for 2012 are 2.5% to 3.5%. That's not a major burden. and is way below your estimate of 10%, which has no basis.

But all of those issues are beside the point. Your observation that 'The US government is not having any problems getting people to buy our debt' is technically incorrect.

No, it is correct. Interest rates on Treasury Bills are very low, which means demand for them is high.

[eagle2]

I dont always agree with Melonie... but on this point I do.

First of all we are talking about a trajectory towards 2014; not the present day. With interest rates practically guaranteed not to move, the economy not showing strong growth, still unstable housing market, and Europe up in the air; it is also guaranteed inflation.

It's not guaranteed inflation. Demand is down and there is a great deal of excess capacity in our economy. In some areas, housing prices are falling.

The slump in natural gas is due to increased production without much demand because of a mild winter. They will cut back production. Gas prices have stabilized. Yet any conflict in the mid-east or economic changes in Europe could change that fact fast.

Yes, the price of natural gas and oil are affected much more by supply and demand than by interest rates.

I have no idea where you live, but I have noticed an increase in food prices this past year alone. This article was from March 2011
"Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose."
http://www.cbsnews.com/stories/2011/...20043737.shtml

Food prices were increasing in March as a result of supply and demand, not interest rates. There were major droughts last year, which brought down the supply, and the demand for food has been rapidly increasing in China and India.

Not to mention the fact the Fed keeps pumping out dollars as if it was toilet paper.

The Fed is doing what is necessary to keep the economy growing and prevent a double-dip recession. Right now the Fed is the only one that can do anything to stimulate the economy, since one of our major parties is doing everything it can to keep economic growth down and unemployment high. That's all I'm going to say on this to avoid turning this into a political discussion.

When Melonie talks about 5% interest, it is not mortgage rates. She is talking about savings rates. Actually you are lucky to find a 3% APR interest rate on a CD or Savings account.

So conservatively, if you are making less then 3% on savings (if you are lucky enough to have money to save), average inflation is 3%, so even if there was a jump in inflation by 3%= 6% .... you are actually loosing. That is the point. The average American does not see this big picture.

All the while the big players are going to be making HUGE profits by betting against the consumer, betting against interest rate hikes, and maintaining their status to compensate for the inflation.

Right now the biggest problems with the economy are slow growth and high unemployment, not inflation. One of the sectors hurting most is the housing sector. Keeping interest rates low will make buying a house cheaper. Low interest rates have also greatly helped with the recovery in the auto industry. Also, low interest rates will put more money in the hands of homeowners who refinance at lower rates. The Fed is doing the right thing by keeping interest rates low.

[Melonie]

The price of natural gas has fallen from $152 per thousand cubic meters of gas to $113 over the past year.

The price of US delivery Henry Hub natgas that you have linked to has indeed fallen from $152 to $113, for all of the reasons I already discussed above. However, the price of the Russian natgas delivered to Europe tells a different story, having risen from $325 to $430 per thousand cubic meters over the past year. With price data coming from your very same website, the price differential between 'trapped' US natgas and piped-in european natgas is indeed nearly 3:1 as I had pointed out earlier. Were US LNG export terminal capacity available in sufficient volume, the europeans would gladly be buying US liquified natural gas ( at a probable price level of $250-300 per thousand cubic meter equivalent ) instead of paying $400 to the Russians ... in much the same way as they already 'import' lower priced US coal. This would, of course, increase US Henry Hub gas prices for US consumers to the $250-$300 level as well.

http://www.indexmundi.com/commoditie...-gas&months=12

Industrial production increased 0.4 percent in December after having fallen 0.3 percent in November. For the fourth quarter as a whole, industrial production rose at an annual rate of 3.1 percent, its 10th consecutive quarterly gain.

These days 'industrial production' statistics are almost totally decoupled from energy consumption. There is a HUGE difference, from an energy consumption standpoint, between US industries assembling components which have been imported from overseas, versus US industries ( once again ) firing up steel & aluminum smelters and manufacturing components themselves. Here's a chart of New York's INDUSTRIAL natgas consumption ...



^^^ the early year numbers reflect gas consumption prior to the shutdown of Alcoa and many other 'heavy industries'. As is also fairly obvious, industrial natgas consumption is today significantly less than half of what it was prior to the late 90's 'outsourcing' of raw steel, aluminum, etc. and the early 2000's 'outsourcing' of steel and aluminum manufactured components.

One of the sectors hurting most is the housing sector. Keeping interest rates low will make buying a house cheaper. Low interest rates have also greatly helped with the recovery in the auto industry. Also, low interest rates will put more money in the hands of homeowners who refinance at lower rates. The Fed is doing the right thing by keeping interest rates low.

Forgive the potentially political response to an undisputably political point, but Keynesians have again ignored a basic economic principle. In order for the housing sector, the auto sector etc. to experience REAL growth, would-be buyers of housing and autos need to have enough 'value added' earnings potential ( on global terms these days ) to be able to AFFORD to pay for those houses and autos. Net of taxes, 'middle class' US incomes are declining. The FED holding interest rates near zero does make the all-in cost of houses and autos marginally less expensive ... but that marginal contribution is insufficient to prevent some portion of 'subprime' mortgage and auto loan borrowers from defaulting in any case. The Austerians would tell you that REAL growth won't resume until the 'subprime' buyers, who should never have been approved for said mortgages and auto loans in the first place due to their de-facto inability to repay, are priced / defaulted out of the market - with the 'overhang' of unsold / repossessed home and auto inventory then being absorbed by buyers who CAN afford the purchase, and with the mortgage and auto lenders actually booking the resulting 'subprime' loan losses. Arguably, zero interest rate FED policy is being used as an 'extend and pretend' scheme to allow those mortgage and auto lenders, and their 'rich' stockholders / investors, to avoid facing up to those losses.

Just to be clear, my only real purpose in stating the above is to point out that FED zero interest rate policy is not likely to achieve the objective you are expecting. It is, however, creating a significant number of negative 'unintended consequences' - among them US dollar denominated price inflation of world commodities like food and energy. And no, due to restrictions in US export capacity, natural gas is NOT a world commodity. Additionally, FED zero interest rate policy is creating a 'stealthy' INTENDED consequence, i.e. protecting rich wall st. bankers / investors from experiencing the losses otherwise resulting from their prior 'subprime' lending practices.

No, it is correct. Interest rates on Treasury Bills are very low, which means demand for them is high

NO, it means that the FED is PAYING primary dealer banks 3% guaranteed risk free earnings to purchase Treasurys at auction using 'free' money that was newly printed by the FED and newly loaned to the primary dealer banks at 0% interest !!! There isn't any 'free market' supply versus demand equation at work here. The FED's printing press theoretically provides an infinite supply of US dollars, and the FED's arrangement with the primary dealer banks theoretically provides an infinite ( artificial ) demand for newly auctioned US Treasuries. Arguably, the FED can continue this 'market fixing' strategy to maintain artificially low interest rates indefinitely ... at least up to the point where Chinese, Japanese, Saudi and other mass owners of existing US Treasuries decide to start selling them off to cut their currency exchange rate losses. If and when that happens, grab your 'crash helmet' !