The FOMC meeting today and tomorrow is the most anticipated Fed meeting since, well since last September. ( The QEfinity meeting) This year it is “Taper” do they or don’t they? No doubt the markets will react and volatility will jump a bit. The talking heads will spew more hot air in the next few days than the manufacturing sector. Bernanke will have two goals: 1.Initiating some policy change to take pressure off and give some breathing room to the incoming chairperson. (My one objection to Janet Yellen will be repeated use of awkward gender neutral terms like chairperson. Ugh.) 2.Further obscuring Fed communication as the transparency that is so helpful when in a rate lowering cycle becomes a hindrance when it comes time to remove the punch bowl, or at least dilute the punch.
The good Chairman mentioned tapering back in May and punctured the complacency of the interest rate markets and roiled both stocks and bonds sending allocators to the exits. I believe Bernanke deliberately and brilliantly acted to deflate a building bubble and reduce the chance for a panic liquidation down the road. I do not for a minute believe any serious tightening is going to occur. Loose monetary policy is going to continue indefinitely, though the name and form may change to make the continuing debasement of the currency somewhat less obvious. But make no mistake, aggressive debasement will continue as long as official inflation stays down near 2%.
History clearly demonstrates the ultimate fate of paper money is to lose value until it becomes worthless. The flaw is not an inherent quality of paper. The flaw is the result of degenerate politicians and banking officials. Robert Persig wrote the following remark in another context but I quote him because it so perfectly describes modern monetary governance in the entire developed world.
“Degeneracy can be fun but it is hard to keep up as a serious lifetime occupation.” Persig
So enjoy FOMC show but don’t take your eyes off the ball. The Fed is still far more worried about deflation than inflation. Talk about policy may get more hawkish, actual policy won’t.