The Federal Reserve’s announcement today (March 11th) that it will be providing an added $200 billion in liquidity to the system in a coordinated action with other central banks, on top of the $200 billion emergency funding announced by the Fed on Friday (March 7th), again highlights the depth of and the ongoing deterioration in the banking system’s solvency crisis. The good news is the Fed will create whatever dollars it needs to keep the system from imploding. The bad news is the price that will be paid in higher inflation. Despite any relief rallies that seem to be taking place in the equity and dollar markets, the news here has horrendous implications for the dollar and inflation, corresponding positive implications for gold, and likely continued trouble for equities.

Several readers questioned how the temporary auction facility (TAF) lending was spiking money growth, where the Fed purportedly is neutralizing the monetary impact of that activity. First, it is not obvious that the Fed has been so neutralizing the increased TAF lending. Second, what the Fed appears to be doing is lending against otherwise illiquid mortgage backed securities, providing the illiquid banks with liquidity that would allow somewhat normal functioning, including ongoing expansion of the money supply. When the crisis hit in December that triggered the TAF creation, the systemic liquidity crunch caused a dip in the annual money growth rates. As new or "refreshed" liquidity has been pumped into the system, money growth has resumed its upside movement. 

As to the upcoming February retail sales (Thursday, March 13th) and CPI (Friday, March 14th) reports, retail sales are at fair risk of contracting for the month, despite expectations of a month-to-month gain. In any event, monthly and annual change should be negative, net of inflation. Expectations are around 0.3% for the monthly February CPI gain; anything above 0.17% will add directly to the 4.3% annual CPI inflation seen in January. Risk to inflation reporting appears to be on the upside.

More complete analysis follows in the newsletter.