Great speech by John C. Williams, Executive Vice President and Director of Research, Federal Reserve Bank of San Francisco, Presentation to the Seattle Community Development Roundtable. I’d recommend reading all of it, but there’s a section on inflation and QEII (my bold):
I’d like to turn now to inflation, or, I should say, the lack of inflation. The measure of inflation we follow most closely is the core personal consumption expenditures price index. These prices have been rising at a 0.9 percent rate so far this year. This is the lowest nine-month inflation rate recorded in the over 50 years that this statistic has been compiled. Our forecast is that inflation will come in about 1 percent for the year as a whole and stay at that rate next year. That’s about 1½ percentage points below where it was at the start of the recession and well below the level of around 2 percent that most Fed policymakers have said is consistent with stable prices.
Mike here, quick break. Yes I bolded almost the entire paragraph. Inflation is much lower than it was before the recession. It’s only at 1% and will be that rate next year as well.
And repeat after me: 2 percent inflation is consistent with stable prices. Inflation is under 2 percent. Prices are not stable. Therefore the Federal Reserve isn’t hitting it’s price stability mandate, even forgetting the maximum employment mandate. It’s accomplishing 0% of its job, not even half of the dual mandate.
Back to Williams (still my bold):
It’s hardly a surprise that inflation is so tame. There is a great deal of slack in the economy and workers are in no position to demand sizable wage increases. And both consumers and businesses have learned to wait for bargains before making purchases. Our retail contacts speak of a brutal sales environment in which heavy discounting has become the norm and holiday sales start around Halloween.
Figure 3: Rising Risk of Deflation
To me, the danger is that weak demand and excess productive capacity could cause inflation to fall further, taking us perilously close to deflation….Few of us have experienced an extended period of deflation, but it’s not pretty. TheNew York Times recently ran an article about how ordinary Japanese citizens coped with deflation. It described how people stopped buying homes, cars, and other discretionary items because they could be had for a cheaper price in the future. Businesses postponed investments because the returns from holding cash were better than what they could reliably expect to earn by expanding operations. The article conveyed a pall of gloom that hung over the Japanese economy, sapping confidence and further fueling a deflationary hesitance to spend…
Finally, and perhaps most importantly, we’re also different from Japan in monetary policy. One lesson from Japan’s experience is the need to act aggressively before deflation becomes firmly entrenched. In contrast with Japan, the Fed has adopted proactive measures to head off a deflationary spiral before it can take root. This brings me to current Fed policy and, in particular, the recently announced program to purchase Treasury securities.
By way of background, it’s important to understand that by law Congress has charged the Fed with two objectives: maximum employment and price stability. Currently, the Fed is falling short on both counts. Unemployment obviously is unacceptably high. And, as I’ve explained, inflation is somewhat below the level that is consistent over the long run with stable prices. In other words, the Fed would like to kick the recovery into a higher gear and nudge inflation up a bit, avoiding further disinflation…
Fed’s latest program involves purchases of a further $600 billion of longer-term Treasury securities, which will be carried out at a pace of about $75 billion per month. The idea is the same as before–to push medium and longer-term interest rates down further, giving added support to economic activity. So far, the responses in financial markets show that this program is working.
Like all monetary policy decisions, there are risks associated with this action. I would like to talk about the concern that we may see a return of high inflation because of the large amount of monetary stimulus. Although I take this concern very seriously, I see the risk of high inflation as remote. First, there are no signs of the kind of overheated economic activity that triggers inflation. Indeed, all measures of slack I know of show the economy is running well below its potential and inflation is trending down, not up. Second, the inflation expectations of households, investors, and economists point to low, not high, inflation in years to come. In the 1970s, the last time we saw runaway inflation, inflation expectations had clearly become unmoored. Third, the Federal Reserve has the means and, most importantly, the will to reduce monetary stimulus when appropriate. As it has for the past three decades, and as it affirmed in the November 3 policy statement, it will monitor the economy carefully and adjust the stance of monetary policy to preserve price stability.
The Palin/Paul idea of hyperinflation is nonsense here. Inflation is trending downward, expectations are set to low inflation and the Federal Reserve is going to pull the plug well before inflation gets out of control.