Yellen Indicates No Inflation Until 2013

From soon to be #2 at the Fed, Janet Yellen today –

http://www.frbsf.org/news/speeches/2010/janet_yellen0323.html

“In light of these continuing headwinds in the financial system, the housing market, and the job market, I expect that the economy will be operating well below its potential for several years. Economists use the term “output gap” to refer to an economy that is operating below its potential. We define potential as the level where GDP would be if the economy were operating at full employment, meaning the highest level of employment we could sustain without triggering a rise in inflation. Obviously, with the unemployment rate so high, we are very far from that full employment level. In fact, the output gap was around negative 6 percent in the fourth quarter of 2009, based on estimates from the nonpartisan Congressional Budget Office, or CBO. That’s an enormous number and it means the U.S. economy was producing 6 percent fewer goods and services than it could have had we been at full employment. In view of my forecast of moderate growth and high unemployment, I don’t expect the output gap to completely disappear until sometime in 2013.

This idea of an output gap has important implications for inflation. We have a tremendous amount of slack in our economy. When unemployment is so high, wages and incomes tend to rise slowly, and producers and retailers have a hard time raising prices. That’s the situation we’re into today, and, as a result, underlying inflation pressures are already very low and trending downward. One simple gauge of these trends comes from looking at the U.S. Commerce Department’s price index for core personal consumption expenditures, which excludes the prices of volatile food and energy products. These prices have risen a modest 1.4 percent over the past 12 months, below the 2 percent rate that I and most of my fellow Fed policymakers consider an appropriate long-term price stability objective. I just predicted that the output gap might not disappear until 2013. If the economy continues to operate below its potential, then core inflation could move lower this year and next. “

She expects deflation over the next two years and no inflation until at least 2013!

The Government is borrowing at a pace of 9% of GDP this year, and growth this year should come in around 3%, or

9% Spending with borrowed money – 6% Output Gap (over capacity) = 3% Growth

What she is telling us is that the Government can print many more trillions of Dollars without worrying about any Inflationary consequences. Put another way, the Fed can keep on letting hedge funds and banks borrow at 0% and lever the money to infinity for at least the foreseeable future.

Thus today’s bonanza in the stock market.