Today’s FOMC policy announcement from the Federal Reserve basically sends a message that Bernanke & Co. doesn’t care one wit about the sinking dollar or the rising gold price. In fact, the latest policy directive removes last month’s reference to commodity-price increases, while there is no reference to the greenback at all. The central bank is going to keep buying mortgages and adding to its balance sheet of high-powered money creation.
A Bloomberg story last night said the Fed has been talking to government bond dealers about something called “reverse repos,” which simply means the Fed would sell Treasury bills to Wall Street and withdraw cash liquidity from the financial system. But there’s no mention of this exit strategy in today’s policy memo.
Essentially, the whole reverse-repo business has to do with the Treasury’s debt-ceiling limitations and the fact that the U.S. government is taking back $200 billion of cash sitting at the central bank. So the Fed could absorb some of that $200 billion through the reverse RPs, or simply let excess reserves held on deposit at the Fed go up another $200 billion. Whatever, it’s a technical matter.
The bottom line is that the Fed is going to continue to create an excess supply of new dollars, which is why the dollar exchange rate is likely to keep falling while gold and other commodities keep rising. Today’s incipient inflation will become much more pronounced in the next year or two. Helicopter Ben is not turning into King Dollar Ben.
Actually, I believe the Fed and the Treasury want to nurture a cheaper dollar to boost U.S. exports as a means of fine-tuning stronger economic growth through the international channel. But there is no exit strategy from dollar creation. That’s gonna wait well into next year.
It’s ironic that today’s policy announcement sounded much more optimistic in terms of the economy. And in view of this great monetarist experiment — which really is Friedmanism run amok — the Fed and everyone else may be surprised by a barnburner of an economic recovery over the next four to six quarters. Anticipating this, the stock market has had a tremendous run, and will probably continue on its upward path.
Trading has been lackluster following the Feds’ statement, with the Dow up only 20 points as of this writing, somewhat lower than the pre-Fed level. Reflation investments in industrials and commodities are clearly the place to be with the Fed strategy.
But heading into the G20 meeting, the U.S. has no exit strategy for fiscal or monetary policy. That could well create more problems, including more chatter from China and others about the dollar’s status as the world’s reserve currency.
The Obama-Geithner-Bernanke dollar-depreciation strategy is fraught with risk.