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Inflation now “moving higher,” Fed president notes

Expect even more if U.S. follows ECB’s lead on negative rates

Got gold? Inflation now seems to be “moving higher,” said a Federal Reserve branch president who just last year was warning of too low inflation.

“With inflation still below target, albeit rising, and unemployment still high, but falling, the Fed faces a classic monetary policy challenge,” St. Louis head James Bullard said. “How quickly should the committee move to return monetary policy to normal given improving labor market conditions?”

Of course, don’t tell the man on the street that inflation is still “below target.” Anecdotally, the price of everything needed for survival, such as food and fuel, seems to be going up, along with the cost of insurance, higher education, and more. Meanwhile, the Fed continues to blow huge asset bubbles in the stock and real-estate markets, resulting in a soaring population of millionaires in the U.S.

It was only last August that Bullard saw a very different inflation picture. “Inflation has been running very low. I have been concerned about low inflation,” he told a Rotary Club luncheon in Paducah, Ky.

The question remains, and we’ve asked it before, is: Do you trust these money printers to be able to dial down inflation once they’ve dialed it up? Even inflation slayer Paul Volcker, who ran the Fed in the 1970s, doubts the central bank’s infallibility. “All experience demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse,” he warned in May 2013.

And don’t believe that the Fed is necessarily looking to raise interest rates anytime soon, especially in the wake of the European Central Bank’s unprecedented move last week to impose negative interest rates. Former Dallas Fed chief Bob McTeer, for one, believes the U.S. central bank might be under pressure to follow suit.

“Excess reserve deposits built up at the Fed are at the heart of the problems the Fed’s easy monetary policy has had in stimulating more bank lending and thus faster growth of money and credit,” he wrote at Forbes. “The Fed’s measures to create more reserves for banks have had only a weak result because of banks’ reluctance to lend or invest those reserves more aggressively. (Of course, the weak demand for loans has also been part of the problem.)

“The most direct thing the Fed could do to break the logjam would be to see what happens if it reduced the interest it pays, and possibly to follow the ECB’s lead in making it a penalty rate in nominal as well as real terms. The last time I looked, the M2 money supply has grown only at a 6.9 percent rate during the past three months, about the same as in the last few years. Normally 6.9 percent money growth would be excessive, but that has been partially offset in recent years by a three to four percent decline in M2 velocity. … The decline in velocity in the first quarter almost entirely offset money growth to allow for only a 0.3 percent nominal GDP growth. If this continues, the Fed may be forced to follow the ECB’s lead—which is a turnaround from recent experience.”

With monetary velocity at or near all-time record lows, according to Michael Snyder’s Economic Collapse blog, the Fed might not be finished just yet in trying to generate inflation. The time to prepare your portfolio with gold and silver is now, as a hedge against the hubris of money masters like Janet Yellen and James Bullard.

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