President and CEO of the Federal Reserve Bank of St. Louis James Bullard said that policy makers may not start to raise rates until early 2012 while facing a “too low for two long” argument that may “weigh heavily” on the central bank. “The main challenge for monetary policy going forward will be how to adjust the asset purchase program without generating inflation and still providing support to the economy while interest rates are near zero.”
This should come as no surprise coming from Bullard. Back on September 1st, Bullard said the Federal Reserve interest rate hikes may be “quite a ways away”. Today, we now know how far. Remember, this is important because Bullard will become a voting member of the Federal Open Market Committee next year. Unlike most Fed presidents, he is clearly a big dove now.
However, he won’t be in the future and that will mean excellent interest rate volatility in the future. He believes that the Greenspan method of incrementalism had no merit and no theory behind it. This means that when the Fed gets actually in a tightening mode, they could tighten aggressively by 50 or 75 basis points. Volcker Volatility!
I believe this is the way going forward and what I warned about on CNBC's Kudlow Report on Monday. My outlook is that the inflation that will be generated by the Fed’s massive easing today will show up in 2 years or less. If I want to get very negative about inflation, I would say that this inflation will show up precisely at the same time that tax rates are going up in the United States and the current Health Care bill is getting implemented.
This evokes many of the images from the 2012 movie except we won’t conveniently be in an airplane when it starts happening. (BTW, any recent movie with John Cusack is ripe for crashing.)
Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.