“When real interest rates start to move up, that’s when the crisis could hit.”
So the Federal Reserve Board spent six years and boosted its bond portfolio to $4 trillion in an effort to boost the rate of inflation to 2%.
How did that go? Not so well.
This week, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.7% in January on a seasonally adjusted basis. It was the third consecutive month of decline; over the past year, the “all-items index” decreased 0.1% before seasonal adjustment.
In other words, the U.S. has joined Europe and is in deflation mode. It’s the first time the CPI hit negative territory for the year since the beginning of the financial crisis in 2009. Imagine how low prices would be if the Fed didn’t buy all those bonds!
That dropping oil prices caused U.S. deflation underscores the foolishness of the Fed fantasy about a 2% inflation rate.
As David Stockman’s Contra Corner put it, “the CPI measure of inflation is so distorted by imputations, geometric means, hedonic adjustments and numerous other artifices, that targeting to 2% versus 1% or even a zero rate of short-term measured consumer price inflation is a completely arbitrary, unreliable and unachievable undertaking. Yet, (Fed Chair Janet) Yellen’s latest exercise in monetary pettifoggery is apparently driven by just that purpose … ”