But Ben Bernanke and the Tools of the Fed are cavalierly dismissing any notion of incipient inflation. They keep insisting, “Core inflation is all that matters! Forget fuel and food and commodity prices! It's Core Inflation!” As if people bought more of this magical “core inflation” at the supermarket than food, and filled their cars with “core inflation” rather than gasoline.
Anyway: Bernanke and The Tools need to keep interest rates artificially, sickeningly low. Their rationale is that their Zero Interest Rate Policy (ZIRP) and Quantitative Easing 2 (QE-2) are necessary so as to kickstart the economy. But they also recognize that if they raise interest rates, the Federal government would not be able to finance itself—
—in other words, the Federal government will go broke if the Fed raises rates.
This is really the crux of the matter: The Federal Reserve is in a position where they realize that if they raise rates, they bankrupt the Federal government. So they have to stand pat, and pretend to the public and to themselves that there is no inflation, it’s all just a mirage.
As it is, the Fed debt monetization policy otherwise known as QE-2 is buying up 50% of the Federal government’s deficit for FY 2011. And though QE-2 is supposed to end in June, Treasury funding requirements are so huge—and the Treasury bond market is so weak, especially now that Japan is in crisis mode and will not be able to buy up its regular share—that Quantitative Easing will have to be extended.