Fed Jerks Promise Continued ZIRP Availability

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. Federal Reserve

After reading the Bloomberg article noted earlier I was worried about the continued supply of ZIRP. Fortunately, if you're a highly leveraged money center bank, the Fed has promised to continue jerking ZIRPs for an extended period.

Perhaps the conversations which inspired the Bloomberg article about potential reverse repos aimed to allay the concerns noted in the minutes of the last Fed meeting: Participants noted concerns among some analysts and business contacts that the sizable expansion of the Federal Reserve’s balance sheet and large continuing federal budget deficits ultimately could lead to higher inflation if policies were not adjusted in a timely manner. To address these concerns, it would be important to continue communicating that the Federal Reserve has the tools and willingness to begin withdrawing monetary policy accommodation at the appropriate time to prevent any persistent increase in inflation.

As most interested observers of finance know by now, the lag between investor concern and investor sale has diminished rapidly over the past few decades. Dependence on international finance decreases that lag further while the addition of increased leverage increases volatility. As Einstein might have put it, "timely" is a relative term.

For now though, the Fed remains largely unconcerned about inflation: Most participants anticipated that substantial slack in resource utilization would lead to subdued and potentially declining wage and price inflation over the next few years; a few saw a risk of substantial disinflation. However, some pointed to the problems in measuring economic slack in real time, and several were skeptical that temporarily low levels of resource utilization would reduce inflation appreciably, given the loose empirical relationship of economic slack to inflation and the fact that the public did not appear to have reduced its expectations of inflation.

With the benefit of hindsight I suspect future researchers will look back on the Fed's US centric approach to price inflation pressures as misguided. While the world may still feel the effects of a US sneeze, global commodity prices increasingly ask "how high" when the Chinese say "Jump!", regardless of US resource utilization slack. Given the continued availability of ZIRPed US$s why wouldn't speculators enjoy a ride on that train, and raise prices further still.