Peter Warburton to Moneynews: Fed Tolerates Growing Inflation Pressures

Sunday, 23 Dec 2012 02:11 PM

By Forrest Jones and John Bachman

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The Federal Reserve’s repeated moves to loosen already extraordinarily loose monetary policies reflect a willingness on the part of monetary authorities to tolerate mounting inflationary pressures in exchange for job creation and more robust recovery, said Peter Warburton, director of Economic Perspectives, a U.K.-based consultancy.

Since the downturn four years ago, the Fed has unleashed a slew of stimulus measures to prop up the economy.

Stimulus tools have included slashing benchmark interest rates to rock-bottom levels to more unorthodox measures such as quantitative easing (QE), under which Fed buys bonds such as Treasurys or mortgage debt held by banks, pumping the financial system with liquidity to make sure borrowing costs stay low across the economy.

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The Fed has been running a third round of QE in which it has been buying $40 billion in mortgage-backed securities a month from banks for several months now.

A first and second rounds of QE injected over $2 trillion into the economy, and the Fed recently said it would beef up QE3 by adding an additional $45 billion in asset purchases from banks, namely U.S. government debt, bringing total liquidity injections to $85 billion a month, with the aim of keeping borrowing costs low to spur investing and hiring.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Side effects to such policies include rising stock prices, a weaker dollar and mounting inflationary pressures, the latter of which doesn’t appear to bother the Fed right now.

The Fed has also said interest rates will stay low until the unemployment rate drops to 6.5 percent from its current level of 7.7 percent, provided inflation rates don’t climb above 2.5 percent.

Bottom line, with policy so loose, don’t expect monetary authorities to sound inflationary alarm bells anytime soon.

Past easing measures came amid times of mounting inflationary fears, though the Fed continued to intervene time and time again, which reflects the notion the Fed would rather see price pressures mount than risk seeing unemployment rise and a deflationary cycle build.

“I think on a number of levels I am much more inclined to the view that inflation has a lot of upside potential,” Warburton told Newsmax TV in an exclusive interview.

“The deflationary risk, certainly as measured in the bond market, has receded all the way through, but hasn’t stopped the Fed from acting, so it’s suggesting that the body language now is to be more tolerant of inflation.”

The sheer size and complexity of the Fed stimulus tools in place suggest the Fed is comfortable with expansionary monetary policy sticking around as well.

“I think what we have now is a very complicated policy. It’s like we’ve added things to it without real consideration of how those pieces fit together,” Warburton said, adding that on top of multiple rounds of QE, Fed members who vote on monetary policy now publicly express their opinions as to when changes to policy may occur.

“We’ve now got some of what I call path-dependence guidance as well, which is saying if unemployment comes down from a current 7.7 percent to 6.5 percent, then maybe policy would be tightened. If inflation is viewed by the Fed on a forecast on a one- to two-year view as being above 2.5 percent, that could bring the extreme ease of policy to an end,” he noted.

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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