Pentonomics – The Fed’s Batting Avg.

February 28, 2011 at 11:36 AM

Rest easy all of you 43 million people on food stamps. The President of the St. Louis Fed, Jim Bullard, said in a CNBC interview this morning that; “The economy’s definitely doing better than it was last summer and fall…So I’m encouraged by that. I think we’re in good shape for 2011.” He went on to suggest that the rise in oil prices hasn’t lasted long enough to provide a shock to the economy, and should concerns about oil supplies from the region wane in the next few weeks, “this will go away.”

So even though Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases jumped 15% from a year ago last January; and even though over 1/8th of our entire population is now on food stamps, our central bank is assuring us that soaring energy and food prices aren’t much of a concern. Food prices have risen 25% YOY on a global basis and U.S. gas prices have increased by 17 cents in the last week alone. The Fed’s batting average for economic accuracy wouldn’t qualify them to play in my son’s tee ball league.

Not to be outdone by Mr. Bullard, the Fed’s Vice Chair, Janet Yellen, stated last Friday that rising bond yields were essentially the result of the Fed not living up to their inflation creation expectations. Yellen said “the back-up in yields in part reflected a scaling down of expectations” held by market participants about “the ultimate size” of the program. You got that? The Fed creates money out of the blue (inflation), which of course sends bond yields rising in the attempt to provide a positive return after inflation for investors. However, Ms. Yellen has the hubris to believe that she and her buddies at the Fed can control the entire yield curve forever. And that market forces had nothing to do with soaring bond yields…it was rather that the Fed didn’t print enough money.

The takeaway from this is powerful. When rates rise even further—as they must to compensate for rising inflation—the Fed will respond by printing more and more money until they succeed in driving yields lower. Which they never will, because the more they print the higher they must go.

I’m not sure what solace those who are on federal food assistance will find when learning their food stamps aren’t worth enough to mail a letter.