The Federal Reserve, while telling the public that inflation is low, is spending $27 billion to buy protection for itself against inflation.
Today's statement from the Federal Reserve Open Market Committee said "Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters" and "measures of underlying inflation are somewhat low." It also made reference to "subdued inflation trends, and stable inflation expectations."
Yet the fine print of the accompanying statement by the Federal Reserve Bank of New York indicates that of the $900 billion in Treasury securities that the Federal Reserve Bank intends to purchase, 3%, or as much as $27 billion, will come in the form of TIPS, or Treasury Inflation Protection Securities. As the Treasury Web site explains, TIPS "provide protection against inflation."
The Federal Reserve, under law, is supposed "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." If the Fed does its job of maintaining stable prices, it shouldn't need to buy inflation insurance. They are the ones in charge of keeping inflation low. If you watch their actions rather than their words, they don't seem to have much confidence in their own abilities, or at least want to hedge against the chance that they might screw up.
The kicker is that, the day after an election in which a lot of voters were trying to send the message that they were skeptical of central planning by Washington experts, the big news affecting the markets was not the election results but the Fed statement and action. The newly elected Republicans in Congress will want to address health care and taxes. Great. But what would really be a refreshing change would be if they would man up when it comes to their Constitutional responsibility on the dollar. The public and the markets have already gotten wind of what some are calling "the smoking printing press" — witness the gold price. But when the custodians of the dollar at the Federal Reserve are buying themselves inflation insurance — well, it's not exactly a confidence producing measure.
