Recently, the Fed has made it clear it wants higher inflation (that's addressing the price side of the equation). The Fed used the almost flat-line year-over-year increase in last week's announced Consumer Price Index (up only 0.6% year-over-year, an all time low) as justification for embarking on QE 2. But announcing it wants higher inflation seems to have scared people holding bonds. Instead of driving interest rates down, rates have risen from around a 2.4% yield on 10-year Treasuries to the recent 2.9% level.
Bill Dudley, President of the New York Fed and a former Goldman Sachs chief economist, used the very high unemployment rate of 9.6% as justification for employing another round of QE. The theory is money injected into the system will lower rates and encourage banks to lend and people to borrow and jobs will be created. But the money being injected seems to be convincing people that inflation is the next issue we will have to face as too much money chases too few goods, and rates are going up, not down.
Senator Bob Corker (R-Tenn.) has called it the Fed's "bipolar mandate."He was quoted in the Wall Street Journal as saying, "The pressure to bring down unemployment using money creation. . . will complicate the task of maintaining stable prices. As the Fed pushes money out the door, whether or not there is an economic demand for more dollars. . . the long-term effect may be inflationary as too much money chases too few goods."
In other words, the two mandates conflict with each other.
To try to lower the rate of unemployment requires policies that will raise, not lower, rates. The US central bank is the only one with a dual mandate. The others have the sole job of trying to achieve stable prices. This will be another issue for the Congress to put on its agenda.
But the lame duck session first has to grapple with whether to renew long-term unemployment insurance, or not. If not, 2 million people will run out of benefits November 30 and several million more in the succeeding weeks. Whither goest tax rates is sort of important, and that's on the docket, as are Medicare cuts for doctors and a continuing resolution for money to keep the government operational. Both Senator Reid (D-Nev.) and Representative Pelosi (D-Ca.) have said they will try to get an up-or-down vote on an extension of the Bush tax cuts for all but the rich. That would force the Republicans to vote against it and the Dems will have a nice sound bite for next election of Republicans voting against tax cuts for the common man. You have to admire the maneuver.
Ireland, Portugal, Spain and maybe Italy will be in the news, and the dollar, which was supposed to weaken with QE 2 to support our exports, is doing the opposite and may continue to strengthen against the euro as those debt problems play out. Also, look this week for an upward revision to Q3's GDP from 2% to about 2.3% since inventory accumulation was stronger.
Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.