- Long-term inflation expectations are significantly higher than they’ve been at previous iterations of QE/OpTwist.
- As a result, if the Fed does incrementally ease monetary policy today, it will be a meaningful step forward in the Fed’s policy to debase the US dollar.
As we outlined in a research note Monday titled, “CHINA REMINDS US THAT GROWTH SLOWS AS INFLATION ACCELERATES”:
“… if the Fed announces QE3 on Thursday, the action would be a meaningful step forward in the Fed’s aggression towards achieving its mandates, based upon how elevated domestic inflation expectations are relative to previous iterations of QE/OpTwist.”
Looking to the charts of US 5yr and 10yr breakeven rates (TIPS), long-term domestic inflation expectations are particularly elevated – especially relative to where they’ve been at previous announcements of QE/OpTwist. As a result, any new LSAP policy announcement today out of the Federal Reserve would be a rather aggressive step forward in its pursuit of a lower USD and higher inflation. Never forget that Bernanke, a student of the Great Depression, remains quite fearful of the specter of deflation and could be ready to step up his efforts to avoid it.
Lastly, we’ve outlined in recent notes clear winners and losers from the Fed’s Policies To Inflate:
- FIRE IN THE [JACKSON] HOLE: BATTLE LINES ARE BEING DRAWN IN THE US MONETARY POLICY ARENA (9/22)
- GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY? (9/6)
- CHINA REMINDS US THAT GROWTH SLOWS AS INFLATION ACCELERATES (9/10)
Best of luck out there,