QE III Has Begun

QE III Has Begun

By Michael Pento

January 27, 2012 6:58 PM GMT

The Fed has indicated that quantitative easing part three has commenced. As a part of the Fed's own version of glasnost, Bernanke has sought to lift the veil on the sausage making behind the decisions reached by the FOMC. To that end, our central bank has disclosed they now have an inflation goal of at least two percent. Therefore, the plain and sad truth is that the Bernanke Fed has now provided the holders of U.S. dollars a target rate for its destruction.

The Fed's preferred metric of inflation is the Personal Consumption Expenditures Price Index (PCEPI). This index is now trending lower, falling to 0.8% in the fourth quarter, compared with an increase of 2.0% in Q3. Excluding food and energy prices, the core rate increased 1.0% in the fourth quarter, compared with an increase of 1.8% in the third.

In the Fed's January statement, Mr. Bernanke acknowledged this by saying, "Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable." And in his press conference, the chairman said that his inflation target may have to be breached until the unemployment rate falls significantly further by saying, "...I think there are good reasons, from a dual mandate perspective, to have inflation greater than 2%."

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It should be noted that the PCEPI is the most benign measurement of inflation the government compiles and is currently trailing the real rate of inflation experienced by consumers by about five percent.

Since the Fed believes that inflation is headed further south and is now well below their inflation target on a core measurement, it seems logical to anticipate that Bernanke will take immediate action to defend that two percent inflation target. The Fed Funds rate is already at zero percent, so the only way the Fed can lower real interest rates is to increase the rate of inflation. They do this by creating more credit and purchasing more assets from banks. Therefore, I expect a gradual increase in the size of the Fed's balance sheet over the next few months.

Of course, the idea that the "stewards" of our currency would set a minimum rate for its collapse is abhorrent. It's sort of like the Department of Homeland Security setting a quota for the number of terrorist attacks each year. Not only did Mr. Bernanke opt for an inflation target but he also pushed out the timeframe for the first rate hike until the end of 2014. The Fed is completely convinced that without an inexorably rising rate of inflation, there won't be enough money made available to finance our rapidly increasing national debt. Therefore, we are stuck with a perpetually reducing standard of living and a middle class that is rising fast on the endangered species list.

Michael Pento
President: Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com
O (732) 203-1333
M (732) 213-1295