The U.S. Federal Reserve has blown away the ceiling on the amount of money it will print to protect the U.S. economy from the coronavirus and now plans to do “whatever it takes”, but what about inflation?
That includes buying as much government debt as the Fed deems necessary and lending money to small and large businesses and local governments to help keep employees working.
The Fed said it will establish three new lending facilities to provide up to $300 billion by purchasing corporate bonds, a wider range of municipal bonds, and securities tied to debt such as auto and real estate loans. It will also buy an unlimited amount of Treasury bonds and mortgage-backed securities to try keep borrowing rates low and ensure those markets run smoothly.
“The coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said in a statement. “Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”
The problem is, if the government wants to keep lockdowns in place while simultaneously trying to keep spending at the same level as pre-lockdowns, there will be more money but way fewer things to spend it on. The result? Inflation.
“The extraordinary actions of the Federal Reserve on Monday morning can be boiled down to two sentences,” New York Times reported. “There is a rapidly developing shortage of dollars across the economy. And the Fed will do anything it needs to, on any scale imaginable, to end this shortage.”
Peter Schiff, an investor known for being bearish on the economy and dollar, is not a big fan of government bailouts.
“Since the Fed got away with printing trillions without causing inflation following the 2008 financial crisis, there’s a false sense of security that it can do it again. But printing money is the definition of inflation. This time it’s consumer, not asset prices that will soar!” Schiff tweeted.
Financial markets saw a bounce after the fed’s announcement but the Dow descended back into negative territory within hours, down nearly 300 points about an hour after stocks started trading Monday.
Monday’s announcement by the Fed is an acknowledgment that its previous stimulus plans didn’t go far enough to help an economy shocked by the coronavirus pandemic. Many workers have been laid off or sent home and all consumers have been told to stay home and avoid crowds.
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Last week, the Fed said it would buy $500 billion of Treasuries and $200 billion of mortgage-backed securities. It ran through about half those amounts by the end of the week, CBS reported. The Federal Reserve Bank of New York said it would purchase $75 billion of Treasuries and $50 billion of mortgage-backed securities each day this week.
“Deutsche Bank strategists arguing that fiscal stimulus, in the current circumstances, will be massively inflationary: ‘At present supply is inelastic–unlike in traditional Keynesian formulations–because while the govt might be handing out $100 it won’t allow workers to work,'” Bloomberg journalist Tracy Alloway tweeted.
Market Analyst Jim Wyckoff wrote that all the signs are there for inflation.
“My college economics classes taught me that when you combine higher consumer demand with money that has flooded the banking system it is a sure signal for price inflation—and maybe problematic price inflation at that,” Wyckoff wrote for Kitco. “Ironically, after so many years of low inflation, it may have taken a crash in the world economies into near depression levels to restart price inflation trends that up until a dozen years ago had been rising at significantly higher annual rates.”
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