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Investors bet Fed action will bring inflation

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Michael Mackenzie
Financial Times
Oct 18, 2010

US inflation expectations have jumped sharply in the past two weeks as investors bet that the Federal Reserve’s efforts to boost the economy by pumping in more money will succeed.

Fears over the prospect of a Japan-style “lost decade” of deflation and weak growth have prompted the Fed to show it is prepared to pursue an aggressive bond-buying policy and tolerate higher than normal inflation in the short term.

Ben Bernanke, Fed chairman, reiterated on Friday that the current underlying inflation level of 1 per cent was too low. Policymakers judge a rate of 2 per cent as being consistent with generating price stability and a growing economy.

The prospect of the Fed restarting its expansionary quantitative easing policy, also known as QE2, as early as next month has brought big falls in the dollar, rises in commodity prices and higher long-term Treasury yields – all of which are barometers of higher inflation expectations.

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This article was posted: Monday, October 18, 2010 at 9:17 am

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