Tags: Fed | stimulus | inflation | Bernanke

Fed's Monetary Stimulus Tools Stoking Inflationary Fears — Traders

Tuesday, 18 September 2012 01:36 PM

The Federal Reserve’s decision to pump liquidity into the economy via monetary stimulus tools is already stoking inflationary fears, data show.

To spur a recovery and encourage economic expansion and job demand, the Fed announced it will buy $40 billion worth of mortgage-backed securities held by banks a month until the economy shows marked improvement.

Such a policy tool, known officially as quantitative easing but dubbed by many as printing money out of thin air, arguably plants the seeds for inflation down the road, and some are already investing on the notion that consumer prices are due to climb.

The break-even rate, which measures the difference between nominal yield on the U.S. Treasury and the real yield on the inflation-protected Treasury and gauges market expectations for U.S. inflation over the next 10 years, is on the rise.

The break-even rate rose to 2.73 percent on Monday, the highest intraday rate since May 2006 and near the all-time closing peak of 2.78 percent from March 2005, according to the Financial Times.

“Break-even inflation rates do appear to be moving upwards in a structural way, after the potential regime change at the Fed,” said Michael Pond, a strategist at Barclays, according to the Financial Times.

“The Fed is more focused on reducing unemployment and is prepared to tolerate higher inflation.”

Quantitative easing works by weakening the dollar via liquidity injections, which sends hard assets like commodities rising and in turn brings food and gasoline prices up.

The Fed has rolled out two rounds of quantitative easing since 2008, though the break-even rate didn’t climb then as markets were worried too much over the possibility of deflation as opposed to inflation.

The Fed adheres to a dual mandate of controlling inflation and keeping unemployment rates optimal, and Fed Chairman Ben Bernanke has said creating jobs is of utmost importance for monetary authorities.

“This is a Main Street policy, because what we’re about here is trying to get jobs going,” Bernanke said at a news conference after the Fed announced plans to jolt the economy with stimulus tools, according to Bloomberg.

“We’re trying to create more employment. We’re trying to meet our maximum employment mandate, so that’s the objective.”

Fed officials have said they can take steps to control inflation should price pressures rise, though many experts agree the Fed is willing to tolerate higher inflation rates in the near term, even above its 2 percent target rate, in order to create jobs.

“I see no reason to believe the Bernanke Fed would not take actions needed to prevent inflation from getting out of control,” said Steven Fazzari, a professor of economics at Washington University, according to the St. Louis Post-Dispatch.

“Implicitly, you might say this does suggest they would be willing to accept inflation a bit higher than 2 percent, but I think it's an exaggeration to say they would allow inflation to explode.”

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The Federal Reserve’s decision to pump liquidity into the economy via monetary stimulus tools is already stoking inflationary fears, data show.
Tuesday, 18 September 2012 01:36 PM
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