Not deflation but more disinflation should lead to QE2

With implied inflation rates in the TIPS moving lower to levels last seen in mid ’09, Fed Pres Bullard (Mr. We’re Turning Japanese) is speaking on the economy. While he currently believes that new QE is now not necessary with “core inflation at low but manageable levels and the economy expected to continue to expand,” he doesn’t want to wait for actual deflation before embarking on another round of money printing. He believes all it will take is “increased disinflation risk” and the “purchase size should be in proportion to the size of any deterioration in the outlook.” “One key goal of the program is to keep core inflation in the US from falling close to levels observed in Japan.” Sorry to beat this horse again but he basically believes that if demand weakens further, the Fed must create inflation to raise the cost of goods and services. The law of supply and demand has a different opinion.

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