Finally today, back to Fed-related talk. Make that, Fed-originated talk. Plus, a bit of myth-busting 101 while on the topic, as well.
The US central bank’s San Francisco-arm President John Williams (replacing Janet Yellen) spoke to a group of educators yesterday. He “educated” them on the fact that – contrary to 99.99% of popular perception – the massive expansion on bank reserves is “very unlikely to create an inflation problem down the road.” While some might call this “pure fantasy” and continue to expect the materialization of Harare-on-the-Hudson inflation scenarios, Mr. Williams did explain the mystery to his audience of professionals.
It is most valuable to note that Mr. Williams’ assertions are based on facts and figures that utterly demolish recently heard Armageddon-ish arguments from the hyperinflation camps. “A lot of the anxiety in response to Fed policies is misplaced. Despite all the headlines proclaiming that the Fed is printing huge amounts of money" one of the broader measures of the nation's money stock, referred to as M2, "has grown at a 5 1/2% annual rate on average. That's only slightly above the 5% growth rate of the preceding 20 years."
Mr. Williams remarked that “much of the textbook understanding of money creation and central banking is no longer operative.” Most significantly, he noted that we live "in a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply and ultimately inflation no longer hold." In other words, the “lethal weapon” that paying interest on reserves represents – a relatively new power for the Fed – is so effective that it allows the Fed to exercise a degree of control over such reserves that is far higher than common wisdom perceives.
At the end of the day, that tool, combined with an eventual tightening of monetary policy will ensure that A) reserves do not “flow” into the economy creating inflationary pressures beyond desirable targets and B) that inflation – to whatever extent it does materialize – will not be Weimar Republic- or Zimbabwe-like in nature. Not by a long-shot.
Until tomorrow, the world orbits around the same old themes: The dollar, the Fed, the economy, and – most of all – expectations (right or wrong). Plus ca change…..
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America