The Bernanke Fed is playing with deflationary fire

According to the article, "America is one shock away from a slide into outright deflation, and the eurozone is half a shock away." The Fed is gambling that the US economy will shake off the effects of fiscal tightening of 2%-3% of GDP this year, possibly the biggest squeeze in half a century.

By Ambrose Evans-Pritchard
Last updated: June 24th, 2013
The Telegraph

I hope the Fed knows what it is doing.

It has chosen to tighten monetary policy even though core PCE inflation is actually lower right now than it was when the Fed previously thought it dangerous enough to launch further QE. America is one shock away from a slide into outright deflation, and the eurozone is half a shock away.

personal consumption

Anyone who still thinks the Fed has not just tightened significantly – or that markets have overreacted – should read this lament by St Louis Fed chief James Bullard in the Washington Post:

This was tighter policy. It’s all about tighter policy. You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence.

Here is M1 money to cheer you up:

M1

And here is M1 velocity to cheer you up further:

M1 volatility

Now, short-term M1 money data is very volatile, and can often flash wild signals. Nevertheless, I am frankly flabbergasted by the actions of the Bernanke Fed at this point.

They are gambling that the US economy will shake off the effects of fiscal tightening of 2pc to 3pc of GDP this year, arguably the biggest squeeze in half a century. It may indeed do so, but it may not, and the costs of making a mistake before the US recovery is safely established are asymmetric.

Scott Sumner, the spiritual father of the Market Monetarists, says the errors made by the Fed in 1937 and the Bank of Japan in 2000 did serious damage, while the US suffered little lasting effect when the Fed delayed too long in 1951.

Are we to conclude that Ben Bernanke has lost his nerve and joined the Austro-nihilists?

To see original article CLICK HERE

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