Why the Federal Reserve’s Latest Announcement Should Worry You

Did the Federal Reserve just tell us it wants much higher inflation?

In the most recent meeting minutes from the Federal Open Market Committee (FOMC), it said:

“Most [members], however, now anticipated that the Committee would not sell agency mortgage-backed securities (MBS) as part of the normalization process, although some indicated that limited sales might be warranted in the longer run to reduce or eliminate residual holdings. A couple of participants stated that they preferred that the Committee make no decision about sales of MBS until closer to the start of the normalization process.” (Source: “FOMC Minutes,” Federal Reserve, July 10, 2013.)

Simply put, the majority of the members of the FOMC think the Federal Reserve shouldn’t sell the MBS it has accumulated on its balance sheet through its multiple rounds of quantitative easing.

While the key stock indices rally, and stock advisors continue to say we are going much higher, if the Federal Reserve doesn’t go ahead with this action and keeps the MBS on its balance sheet, this move could have serious implications ahead.

Mark my words: the biggest problem will be inflation.

This is how it works: if the Federal Reserve keeps the MBS it has bought from banks for the sake of providing liquidity to the financial system, then that will increase the money supply—which always causes inflation.

Take a look at the chart below. This chart sums up the relationship between the money supply and inflation. It compares M2 money stock (a measure of money supply and the consumer price index as indicated by the black line) and the “official” measure of inflation (marked by the red line).

               Chart courtesy of www.StockCharts.com

Clearly, the correlation between money supply and inflation is very high and shouldn’t go unnoticed.

My problem is that the Federal Reserve still hasn’t stopped quantitative easing. The damage has already been done—through quantitative easing, the Federal Reserve has inflated its balance sheet to more than $3.0 trillion, and the money supply has increased significantly. Just like throwing more fuel on a fire, the continuation of quantitative easing will only make inflation soar higher.

We are already seeing some inflation, even if the official numbers suggest otherwise. Some mainstream economists are even saying we may see deflation ahead. They will soon find out they are wrong.

Dear reader, I am a consumer, and I go out and shop. I notice that the price of gas has increased substantially, and containers of our favorite foods are shrinking in size with a “no price change” tag slapped on them. Inflation will get much worse, and possibly even get out of control, unless the Federal Reserve starts pulling back on its $85.0 billion-a-month printing program.