Does the Fed want more inflation?
*Barron's, by Jonathan R. Laing & Vincent Reinhart, October 18, 2010:
''The expectation of further quantitative easing is already being
priced into the market even though it hasn't taken place. We've had a
50- to 65-basis-point [0.5 to 0.65 of a percentage point] decline in
yields along the Treasury term structure. When the Fed announces
more quantitative easing, we might not see that much of a reaction in
security prices.
Shouldn't it boost other asset prices along with Treasuries?
There will be a spillover effect on other asset classes such mortgage
securities, other asset-backed debt, corporate debt and even the stock
market, lifting prices some. Quantitative easing will also help
in other respects. When the Fed purchases Treasuries, that also
puts downward pressure on the exchange value of the dollar, and upward
pressure on commodity prices.
Is that a good thing or bad thing?
That depends on your outlook. Certainly you can't expect the
chairman of the Fed to go around making speeches saying 'hooray, we are
depreciating the currency.' Yet dollar weakness is a good thing
as long as it is limited, controlled and gradual. A currency
decline helps exports become more competitive. Rising commodity
prices and more expensive import prices help fight deflationary
forces. Remember, the Fed has said inflation is below its
mandated level at present.
A modest boost in inflation also lowers interest rates in real terms by
narrowing the gap between nominal rates and underlying inflation.
The lower real rates are, the more borrowing and economic activity one
can expect. Just recognize how unique a position we are in right
now. It isn't often that Fed policy involves inducing inflation
rather than fighting it.''
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
Call Now
Let us help you:
Personal Advisors
available now at
1-800-444-8317