Tags: Yardeni | central bank | money | deflation

Yardeni: Easy Money Causing Deflation

By    |   Monday, 23 March 2015 09:36 AM

We all learned in Economics 101 that accommodative monetary policy boosts inflation by stoking economic demand.
But that's not what's happening now, notes economist EdYardeni, president of Yardeni Research. "Repeat after me: easy money is deflationary," he writes in a commentary provided to Newsmax Finance.
"I know that's hard to believe since we've all been taught that easy money is inflationary. However, easy money has been provided by the world's major central banks for so long that it seems to have lost its ability to juice up demand."
And why is that?
"So many borrowers have borrowed that they are maxed out," Yardeni explains. "Easy money can also stimulate supply, especially in recent years because producers overestimated the ability of easy money to boost the demand for their goods and services."
So it's no wonder that despite central bank stimulus around the globe, inflation remains near zero in the OECD's 34 members, he says. U.S. consumer prices slid 0.1 percent in the year through January.
"The central bankers don't get it. They don't understand why inflation has dropped below their 2 percent targets, or why their ultra-easy monetary policies aren't boosting inflation. Their conclusion is that they must continue to provide more easy money, which perversely is deflationary since it is inflating supply more than demand," he adds.
The Federal Reserve indicated in its policy statement last week that it remains concerned about the downward drift of inflation away from its 2 percent target. The Fed's favored inflation gauge, the personal consumption expenditures price index, rose only 0.2 percent in the year through January.
In its statement, the Fed said, "The [Federal Open Market] Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
Many economists expect the central bank will refrain from raising rates until September. The Fed has kept its fed funds rate target at a record low of zero to 0.25 percent since December 2008.
"There's not enough time between now and June to say inflation expectations have bottomed out, which probably pushes you out to September," John Canally, chief economic strategist at LPL Financial, tells Bloomberg.
"The statement about the economy softening a bit raises the market's awareness that the economy is underperforming where the Fed wants it to be, which pushes them out."
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We all learned in Economics 101 that accommodative monetary policy boosts inflation by stoking economic demand.
Yardeni, central bank, money, deflation
Monday, 23 March 2015 09:36 AM
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