Federal Reserve and Monetary Policy: Chaos and Control

The Federal Reserve has been selling its US Treasuries. This action, coupled with raising short term interest rates has one goal: to control inflation and inflationary expectations. There are two targets that is in the Fed's cross hairs; $dollar denominated commodities and the “funny money” housing has generated. Unlike the Federal Reserves ability to control the “irrational exuberance” of the dot com bubble, the Fed can control the “irrational exuberance” of the US housing market and $dollar denominate commodities.

The Fed is controlling States and Local governments from making future promises, aka California, based on current values of the “funny money” houses has generated. This is very dangerous because inflation (or more specifically the home buyer's perception of the property's value) is needed to maintain the value of the property (or “funny money”).

The $dollar is currently indicating the US has, on the surface, fixed its “structural problems”. If the $dollar weakens against major currencies, I think this is an indication that the “global” financial markets have made the decision the US's “structure problems” have not been addressed. The “funny money” that housing has been generated needs to be propped upped (a re-inflation event).

The market has baked in Alan Greenspan's appearance on Capital Hill, however they have not baked in his probable response to the Chines government's attempt to buy an American oil company. It is going to be interesting how a “free market” central banker is going to weasel out of this given the fact that this certain central banker had given a speech about energy and specifically natural gas. Would you like to guess what the nature of this particular oil company reserves are in the Asian regional? Give yourself 10 points if you said natural gas. Greenspan has to balance his view that government should not go down a “protectionist path” to that of having the American people believe that the US government has sold out to the Chinese Communist government.