WHAT’S THE FED’S PLAN B FOR THE COMING FISCAL CATASTROPHE?
Perhaps the most troublesome question that investors and business decision makers confront today is, "When will significant inflation and interest rate increases show up?"
The next quarter, the next year, the next decade? Everyone fears these, but no one can predict exactly when they will appear. Investment is severely hampered by this uncertainty. The potential inflationary/interest rate pressures exist largely as a result of Fed's massive purchase of government bonds and mortgage-backed securities.
But much of this increase in money is locked up in the banks because the Fed now pays interest on the bank reserves held at the Fed (and therefore it is not lent or spent), because of increased regulatory restrictions that discourage banks from making loans to small businesses and consumers, and because of the lack of demand for new loans. In addition, many individuals and businesses are holding unusually high sums to weather regulatory and economic uncertainties.
Yet, there are many factors that could trigger inflationary/interest rate increases that are largely out of the Fed's ability to forecast and control.