The head of the U.S. Federal Reserve announced a third round of quantitative easing (QE).said that the Federal Reserve would spend $40 billion a month on bond purchases in an effort to stimulate the economy and drive the the unemployment rate down.
The good news is that this will decrease costs for travel in the U.S. for those of us living in resource based areas, will drive up the price of oil and other natural resources.
Markets reacted quickly and rose to the highest level since July 2011. The Canadian dollar moved 3c above the U.S. dollar.
Of course, the markets are not concerned what will happen in 2015. The continued printing of money deflates the value of the dollar against other world currencies. This in theory should work favourably on American exports and should relieve pressures on a volatile housing market.
The infusion of stimulus is worth close to a half a billion dollars annually. The elephant in the room is the word "inflation." With resources, especially oil prices rising (yesterday oil rose to $98 a barrel), this will translate into higher prices at the pumps, which will affect a majority of consumer goods.
Bernanke says that he will measure the stimulus success against the unemployment rate, which presently stands at 8.1%. That figure is an artificial one, however, since it does not count those that have given up the search for jobs.
With interest rates already at an all time low, the stimulus is intended to keep interest rates low, But it this realistic? It is intended to give a push to the housebuilders by buying up mortgages Will this just create another bubble ready to burst? Nobody knows for sure.
In its statement the Federal Reserve said that that the economy was growing at a sluggish rate and that it was not concerned about inflation at this time.
"The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,"
After the Federal Reserves announcement The Dow jumped 0.75%, while European and Asian markets 1.54% and close to 2% respectively.
With the elephant in the room being the unemployment rate, which is always higher than the official figures, the Fed is not concerned with those in the margins. It maintains that should the economy improve, they will get a something. Sounds heartless, but that's the reality.
For Canada and European countries it means imported inflation due to higher resource prices, especially oil. There is no escape, since Canadians and Europeans can't drive to Miami, each time they need to fill their tank.
While Americans complain about high prices at the pumps, they are still far cheaper than in Alberta, Canada or Europe. As an example prices at the pumps in Alberta were roughly $1.20 a liter and much higher in Montreal, where they were above $1.50 or $4.80 and $6 a U.S. gallon respectively.
Bernanke's move has angered Republicans. They are not impressed as they observe Bernanke, whom they detest, giving President Obama a boost during an election campaign and are helpless to do anything about it. It is not just Republicans though, economists along with some in the GOP have thrown the world "Gold Standard" into the mix. This would effectively take the key away from the Federal Reserve. While this may be unrealistic for today or tomorrow, it is important to note that this was last seriously discussed in 1971.
Ben Bernanke has made sure that the idea of a gold standard will not disappear quickly in the realm of fantasy. Looking back at super inflation in Germany in the 1920s, it is easily imagined how the printing of more money can eventually end up. After all, the United States has just crossed the $16 trillion mark on its debt clock.
The Fed has set three goals with its new stimulus, contain interests rates at a low level, maximum employment and stable prices. Time will tell whether or not those goals will be achieved.