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Fed Will Foolishly Continue QE Purchases in Search of Higher Inflation

The Fed held interest rates pat and participants expect earlier hikes, but the Fed will not taper its asset purchases.
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Dot Plot of Rate Hike Projections 2021-06

The Fed's Monetary Policy Projections shows the Fed expects to hike by the end of 2023. In March, the median projection was no hikes until 2024.

GDP, Unemployment, Inflation Projections 

GDP, Unemployment, Inflation Projections 2021-06

The Fed wants 2.0% inflation so it predicts 2.0% inflation. The Fed's long-term projection is always 2.0%. 

FOMC Statement Changes 

FOMC Statement Tracker 2021-06

A WSJ Statement Tracker shows today's FOMC Statement was essentially unchanged from March. 

Statement Key Paragraph

  • The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. 
  • The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time
  • In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals
  • These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

No Tapering of Asset Purchases

The key message is the Fed will continue asset purchases even though banks are choking on them. 

Many economists expected a change in policy or at least a hint at a change in policy. Nope, not today.

The Fed either has no idea inflation is roaring if one accurately includes home prices, or it simply does not care.

My take is the Fed is basically clueless, but would not care even if they had a clue.

Group-Think Silliness Well Anchored

I bolded the note about inflation expectations because they are totally meaningless. 

The Fed believes all kinds of group-think silliness, and inflation expectations are at the top of the list.

For discussion, please see Consumer Inflation Expectations Jump 7th Straight Month to a New Record High

Yes, It's Transitory

The Fed's message is that inflation is transitory. 

Curiously, I agree.

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But that is based on the fact that the Fed's encouragement of more debt, policies of keeping zombie corporations alive, and most of all, sponsorship of bubbles, are very counter-productive, long-term, to the goals the Fed foolishly seeks.

The Fed's policies coupled with stimulus from Congress, sponsor short-term inflation but are a long-term impediment to growth. 

The buildup of debt as demographics get worse are not inflationary.

That is the message from Japan and Europe and the Fed cannot see it. Nor can those addicted to watching the CPI as if it forecasts the future. 

Corporate Investment is Sinking 

Fed's Balance Sheet, Bank Deposits, Bank Loans 2021-05

Despite the Fed's attempt to cram more debt into a system already choking on it, corporate investment is sinking.

I commented Charts That Should Scare the Pants Off the Fed (And Probably Do)

Impact of Three Rounds of Stimulus on Retail Spending Dollars in Pictures

In case you missed it, please see Impact of Three Rounds of Stimulus on Retail Spending Dollars in Pictures

What are the Fed and Congress going to do next with stimulus wearing off and banks choking on the Fed's QE already?

Looking ahead, the fourth quarter and 2022 GDP and will be much weaker than most expect.

The irony in the Fed's actions is they are indeed increasing inflation, but only in the most unproductive, yet uncounted ways.  There's plenty of inflation now, just not as they measure it.

Their attempts to increase inflation (as generally measured) are very counterproductive. 

Increasing Inflation? As Measured? Don't bet on it!

And when bubbles burst, expect another painful round of asset deflation, likely accompanied by the price deflation they fear.

That's what's so blazingly foolish about Fed group-think policy.


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