The Fed wants investors to be as unconcerned as the central bank is about inflation. Even though year over year consumer price inflation is above its target, the Fed chose in its latest press conference to claim the 2.1 percent YOY increase in prices paid merely represented “noisy†readings in the inflation gauge. However, the truth is that rising prices are a direct result of years’ worth of zero percent interest rates and $3.5 trillion in money printing provided courtesy of both Banana Ben Bernanke and the Counterfeiting Queen, Janet Yellen.
It makes no difference to Ms. Yellen that price increases in the major inflation categories are rising above the Fed’s target. For example: Food at Home is up 2.5 percent; Energy went up 3.3 percent; Shelter rising at 2.9 percent; Medical Care Services up 3.0 percent and Transportation Services climbing 3.1 percent. But somehow the widely dispersed increases in year over year inflation, which are already far above the Fed’s target, are being summarily dismissed as “noise†by our central bank. In the spirit of today’s central bankers, inflation is seen not only as a dear friend; but one that they never seem able to recognize face to face.
Ms. Yellen also stated in her press conference that equity prices seem to fairly valued from the Fed’s viewpoint. Perhaps she is also unaware that the ratio of total market capitalization to GDP is currently 122 percent. That figure is the second highest in recorded history—1999 being the only exception—and is 70 percentage points higher than the average from the time Nixon broke the gold window in 1971, all the way through 1990! In fact, this key ratio is a full 10 percentage points higher than it was at the previous peak before the start of the Great Recession in 2007. As a reminder; stock prices proceeded to lose more than half their value from the summer of 2007 thru March of 2009.
The bottom line here is that central banks around the world have fallen into a passionate love affair with inflation and asset bubbles. That is because these fiat-currency apologist believe inflation is commensurate with economic growth; and that the solvency of sovereign debt can only be achieved through massive money printing and negative real interest rates from here to eternity.
