The president of the “conservative” Federal Reserve Bank of St. Louis said on Friday the 22nd that FOMC policy will remain loose for a long time.
There is no problem, he says. This policy of buying $1 trillion a year in Treasury bonds and Fannie/Freddie bonds is more powerful than expected. This will create U.S. economic growth of 3%. Why? The fiscal cliff is behind us. The crisis in Europe is behind us.
It’s smooth sailing from now on.
The stock market rose 120 points on Friday. The investors believe that fiat money creates wealth. It’s fiat money now and forever, as far as the head of the St. Louis FED thinks.
Side effects? No problem.
Distortion of the capital markets? No problem.
Tenured academic bureaucrats in control of the central economic institution, money? No problem.
No free market in money? No problem.
Future price inflation? No problem.
Boom-bust cycle? No problem.
But when monetary base inflation at last produces price inflation, Bernanke’s successor will have to decide: mass inflation, hyperinflation, or monetary stability and another major recession. The FED cannot inflate at zero price permanently.