Profit motive wins out at Federal Reserve

As previously noted the privately owned Federal Reserve has run up the credit card to the limit. The monetary base (reserves and cash) making up 18% of the GDP. Normally it would be about 6%. With a Fed Funds rate of 0.009 the gig was up for the Fed. The Fed had two paths, keep printing money, lose all respect, create inflation, and possibly go bankrupt because it holds billions of low interest junk as its portfolio, go begging for a line of credit from the Treasury, print its way out of its hole, or stand pat and watch the economy deflate like a balloon. It choose the latter. The profit motive and survival won out in the short run.

Federal Reserve Chairman Ben Bernanke

The federal government also had some influence in this. With a huge debt portfolio of its own with significant interest rate hikes the federal governments discretionary spending would be squeezed and the deficit would increase possibly causing the federal government to go out of business similar to the USSR. Not a good combination coming up to 2012.

What does this mean to our local leaders? While inflation fears are temporary subsiding the revenue stream from economic stagnation will continue. Basically the federal government and Federal Reserve are willing to keep the economy under performing so as to salvage their political careers and institutions. The only boom coming will be if the banks decide to cut loose from T-Bills and seek higher returns elsewhere.

Do you hear that sucking sound? That is the US economy deflating and the Federal Reserve taking cover.

Fed holds rates on inflation concerns

By Robin Harding in Washington

Published: June 22 2011 17:44 | Last updated: June 22 2011 19:29

The US Federal Reserve gave a downbeat assessment of the world’s largest economy on Wednesday as it pointed to slower than expected growth and higher inflation.

In the most significant change to its policy statement, it stripped out all reference to “subdued” measures of underlying inflation and said that the economy is growing “somewhat more slowly than the Committee had expected”.

The toxic combination of disappointing growth but higher inflation combined to leave no hint that the central bank will consider further asset purchases to stimulate the economy.

“Certainly there was no hint of ease,” said Jim O’Sullivan, chief economist at MF Global in New York. “One very notable change was dropping the language about inflation being too low.”

The Fed cut the centre of its forecast range for 2011 growth from 3.2 to 2.8 per cent. It also trimmed its 2012 forecast from 3.85 to 3.5 per cent, suggesting that it expects fiscal tightening next year to bear down on growth.

The Fed also raised its forecast range for core inflation in 2011 to 1.5 to 1.8 per cent but made little change to its forecasts for later years.

Policy will stay frozen after the completion of the Fed’s $600bn, so-called “QE2” round of asset purchases that it will complete on schedule at the end of June.

The Fed said that interest rates will remain on hold at 0 to 0.25 per cent for an “extended period” and that it will continue to reinvest in its securities portfolio. That will keep the Fed’s balance sheet at around $2,800bn in size.

Rest of article here.