Tuesday, July 16, 2013

Wanted: Higher Prices

The Federal Reserve is awaiting
That prices may start re-inflating,
So they can foresee
Unwinding QE,
Whose tapering they've been debating.

The Fed will not bother to taper
Its purchase of Treasury paper
'Til the jobless rate now
And inflation allow
An end to their stimulus caper. 

Bernanke must act with agility
To avoid causing stock volatility
'Til he can discern
A sustainable turn
To price and employment stability. 

The market's attention to rates of unemployment and inflation, always close under any circumstances, is especially intense now that the Fed has let it be known that the tapering of their quantitative easing program depends on these factors. Chairman Ben Bernanke and his fellow board members have said that they could begin to reduce the Fed's $85 billion-a-month purchases if mortgage and Treasury bonds once the jobless rate - now 7.6% - falls to 6.5%, and inflation has stabilized around the 2% target rate. 
In the last twelve months of tepid economic growth, inflation has been closer to 1%, raising fears of possible deflation, while the fall in the jobless rate has been painfully slow. However, the latest monthly inflation reading, revealed yesterday, shows June prices up 1.8% over the previous June, which some are taking as a hopeful sign. Prices can be volatile though, so one should be careful not to read too much into one month's data. 

Over the next two days, Chairman Bernanke will testify to Congress, who will no doubt press for definitive word on the economic outlook and the Fed's likely actions. 

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