A copious amount is being harbored by nondepository financial institutions, and another $ trillion is sitting in the cash coffers of nonfinancial businesses. 1  Gasoline prices were not a major factor in January’s headline index, at least relative to the normally wild swings we see in the price of gasoline. On a seasonally adjusted basis, gasoline prices increased 0.9 percent in January (not annualized) and contributed roughly 0.3 annualized percentage points to the headline rate. Based on weekly data collected by the Department of Energy, the price of gasoline in February is on pace for an increase of 6.3 percent over January. Given that the typical seasonal pattern has gasoline’s price falling 1.1 percent in February, we should see a roughly 7.4 percent seasonally adjusted increase when personal consumption expenditures (PCE) data for February come out at the end of March. Gasoline alone may end up contributing about 3 annualized percentage points to February’s headline PCE rate. A more thorough discussion can be found here: www.dallasfed.org/data/pce/2012/pce1201.cfm. 2  FOMC Greenbook forecast, December 1966. BIS central bankers’ speeches  1  Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the Financial Panic of 2008–09, and then kept the medication in the financial bloodstream to ensure recovery.
While price stability is being challenged by the recent run-up in gasoline prices – which has yet to be reflected in the personal consumption expenditure and consumer price indexes but may well make for worrisome headlines when February data are released – the underlying trend has been converging toward the 2 percent long-term goal formally adopted by the Federal Open Market Committee (FOMC) at its last meeting.1 As to the outlook envisioned by the entire FOMC, you might wish to consult the forecasts of all 17 members, which include those of yours truly, that were made public after the January meeting – though I think a puckish footnote appended to the internal document laying out a component of the December 1966 FOMC forecast might still apply: “Not to be used externally, but also harmful if swallowed.”2 Speaking of harmful if swallowed, I might add that I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation – the so-called QE3, or third round of quantitative easing. The Federal Reserve has over $ trillion of U.S. Treasury securities and almost $ billion in mortgage-backed securities on its balance sheet. When we purchased those securities, we injected money into the system. Most of that money and more has accumulated on the sidelines: More than $ trillion in excess reserves sit on deposit at the 12 Federal Reserve banks, including the Dallas Fed, for which we pay private banks a measly 25 basis points in interest.