"The Fed's rationale for buying a stunning $75 billion per month of Treasury notes and bonds (almost the entire issuance) has been its fear that the economy was slowing and its hope that Fed bond purchases would lower Treasury and corporate bond yields in a stimulative manner. Neither part of this logic is working."
This past November Reuters raised a concern about QE2 leading to a commodity bubble. The article observes that the Reuters-Jefferies CRB index, a global commodities benchmark, had hit a two-year high as part of an 18 percent gain since the start of September when markets began to anticipate the Fed's action.
The powers-that-be at the Fed discount the commodity inflation that appears to be rampant. Diane Chu cites the comments of St. Louis Federal Reserve President James Bullard. "What struck me as totally self-contradictory," Chu wrote, "were Bullard's statements regarding the QE2, treasury yield, inflation expectations, and inflation[.]" Chu takes a look at commodity prices:
<< Basically Bullard touts QE2 as building up inflation expectations, driving up treasury yields (thus averting a potential deflationary cycle), which was the goal of the Fed QE2 initiative. Furthermore, Bullard contends that global demand and supply factors are behind the record high prices across almost all commodities, which he believes is unrelated to QE2. . . .
Since the Fed hinted at QE2, commodity price inflation has surged at a record pace during the past six months (Fig. 4) The manifestation of inflation is a combination of many factors including but not limited to expectations, which drives behavior, as well as supply and demand factors.
So, for Bullard to "take credit" for driving up inflation expectations, but ignore its inflationary effect on commodity prices is illogical as well as self-contradictory. >>
Taming the inflation of the late 1970's and early 1980's was a painful process. It seems incredible that the Fed is seeking to spur inflation secure in the confidence it can contain it. By the time it becomes undeniable, it seems to me, the time will have passed when the Fed can shift the gears to reverse without the infliction of substantial pain.