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In Response to Quantitative Easing Critique, Fed Claims 'Declining Inflation

"The problem is that inflation is already running well above a healthy level..."

A group of prominent economists and political strategists are joining the cacophony of voices concerned about President Obama's second round of "quantitative easing." On Monday, 23 economists, former government officials, and political strategists sent an open letter to Fed Chairman Ben Bernanke telling him the stimulus-orientated policy "should be reconsidered and discontinued." The Fed responded by saying inflation is "declining."

Among the signers are former CBO director Doug Holtz-Eakin, Great Depression expert Amity Shales, and Weekly Standard editor Bill Kristol.

The letter appeared in full in Monday's Wall Street Journal:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

(Need a refresher course in "quantitative easing?" Watch the following video:)

The letter was met with an immediate response from the Fed -- a response included in the Journal's story.

"The Federal Reserve has Congressionally-mandated objectives to help promote both increased employment and price stability," a spokeswoman said. "In light of persistently weak job creation and declining inflation, the Federal Open Market Committee’s recent actions reflect those mandates." [Emphasis added]

A recent investigation reported by CNBC shows that "declining inflation," however, may be a figment of the Fed's imagination.

According to a new pricing survey of products sold at Wal-Mart, prices have increased by 0.6 percent in just the last two months, says MKM Partners. CNBC concludes: "At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate."

"A moderate amount of inflation would be considered good for the economy," CNBC says. "The problem is that inflation is already running well above a healthy level, investors said, Bernanke is just not looking in the right place, like a Walmart."

Instead, the article says, he's focusing on real estate. But with the Fed keeping interest rates arbitrarily low, that may not be a good indicator.

“I suspect that when the Chairman thinks about reflation he has a difficult time seeing any other asset besides real estate,” said Jim Iuorio of TJM Institutional Services to CNBC. “Somehow the Fed thinks that if its not ‘wage driven’ inflation that it is somehow unimportant. It’s not unimportant to people who see everything they own (homes) going down in value and everything they need (food and energy) going up in price.”

What exactly is "going up in price?"

"Prices of cotton, silver wheat, soybeans, corn are all up big this year," the article says. "Cotton futures are up the most, climbing 90 percent so far in 2010. The price of silver is up 63 percent."

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