Inflation expectations rising to the highest since Sept ’08

Ahead of the 2:15pm FOMC statement, the implied inflation rate today in the 10 yr TIPS is rising to 2.08%, matching the highest level since Sept 1st ’08 when the fed funds rate was at 2%. Of course much has changed since with the economy but it highlights the dilemma the Fed faces with their dual mandate where they have to both satisfy the need for price stability and full employment. Assuming the FOMC leaves the statement about unchanged particularly with the part about keeping rates “substantially” low for an “extended period,” it will be clear evidence that the Fed doesn’t worry about a weaker US$ and some inflation as they seem solely focused on growth and rebuilding the capital of the US banking system. The problem is that price stability (and a stable currency) is historically the precursor to healthy growth.

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