ThePanelist.com - The Fed Considers Collateral Value vs. Inflation

The Fed Considers Collateral Value vs. Inflation

Written by David Neubert

Thursday, 12 June 2008

Would the Fed hold back on stopping inflation just to protect its new mortgage portfolio? Michael Pento at GreenFaucet certainly proposes the idea. I think the proposal is wrong. The value of collateral held by the Fed is much less important to them than the long-term effects of inflation. Inflation hurts the credibility of the Fed and thus long term interest rates (in the long term). And having an untrustworthy central bank would wreck havoc with the economy and the Fed greater than any losses on the collateral value of loans to banks.

The real worry? Stagflation. The Fed is now considering raising interest rates to stop inflation in the face of a slowing economy.

Disclosure: I hold dollars, the value of which inflation is slowly dwindling. I do not hold mortgage bonds or have a mortgage.