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Takeaway: 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.

SUMMARY BULLETS:

  • 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.

CHART OF THE DAY: WILL BERNANKE GO FOR GOLD? - 2

Lastly, we’ve outlined in recent notes clear winners and losers from the Fed’s Policies To Inflate:

Best of luck out there,

Darius Dale

Senior Analyst