With interest rates near zero and a balance sheet that's in excess of $2 trillion, U.S. Federal Reserve Chairman Ben Bernanke would be very glad to offload some of the Fed's obligations. But so far he's has been unable to do so, as an anemic economic recovery continues to monopolize his attention.
The central bank yesterday (Tuesday) announced that it would reinvest the proceeds from expiring mortgage-backed securities into longer-term U.S. Treasuries. The move should help a weakening economy by keeping mortgage rates low. And while it also may boost inflationary pressures, the central bank feels it had little choice.
"Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months," the Federal Open Market Committee said.
The Labor Department reported last week that the unemployment rate remained unchanged at 9.5% in July. And data yesterday revealed a 0.9% drop in productivity in the second quarter.
At the same time, inflation has fallen to a 44-year low even though the Fed in the past two years has more than doubled its balance sheet to $2.33 trillion. But that may be about to change.
The Oracle of Omaha, as Buffet is known, has shortened the duration of bonds held by his investment firm Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), after warning that deficit spending would force inflation higher.
"The United States is spewing a potentially damaging substance into our economy — greenback emissions," Buffett wrote in an op-ed in the New York Times. "Unchecked greenback emissions will certainly cause the purchasing power of currency to melt."
Buffett has increased his holdings of bonds with maturities of less than a year from 16% to 21% of his portfolio in less than 12 months.
Meanwhile, Rogers – a legendary global investor and chairman of Singapore-based Rogers Holdings – believes that shortages in the agriculture sector will fuel inflation in food prices.
Wheat prices last week hit their highest level in two years, rising almost 50% since late June as Russia experiences a record drought that has destroyed millions of hectares of its land, forcing it to ban grain exports for the rest of the year.
"That's the straw that broke the camel's back," Rogers told CNBC yesterday in a phone interview. "We're going to have much, much higher prices over the next few years."
In fact, higher prices are almost guaranteed because governments around the planet continue to print money to stimulate their economies, he added.
"When you print money, it's got to go in a place where it can protect itself, and that's real assets," he said.
News & Related Story Links:
U.S. Economy: Productivity Unexpectedly Fell in Second Quarter
- New York Times:
The Greenback Effect
Buffett Shortens Bond-Holding Duration After Inflation Warning
Jim Rogers says wheat, agricultural commodities set for steep price rises
- Money Morning:
Drought Forces Russia to Ban Grain Exports