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Saturday, April 16, 2011

Daily Yglesias link.

On monetary policy. Now for something completely different. I think that M Yglesias gets it exactly right in this post.

Inflation Expectations Creeping Up

though [inflation] expectations are now moving in the right direction, they’re still lower than would be optimal. It’d be nice to see expectations pushed all the way up to Reaganesque levels in the 4 or 5 percent range, but even if that’s unrealistic ten year expectations could at least get above two.

I comment

I think you are absolutely totally utterly right. Avent is just looking at the sign. The staggered announcement and current implementation of QE2 is associated with a change of inflation expectations in a desirable direction, but the change is tiny compared to a change which would make up for the lack of fiscal stimulus. Amounts matter not just signs.

I'd add that QE2 is also associated with an increase in medium term nominal interest rates including notably 7 year rates (QE2 is the purchase of 7 year Treasury notes so this is the natural interest rate to check). The bottom line is much less association with lower real interest rates than with higher expected inflation. Bummer.

I'm sure part of the problem is, as you suggest, the inflation hawks which make investors fear that the Fed will respond to the menace of inflation in the target range by causing positive short term safe interest rates.

But the main point (your main point) is that inflation hawks are totally wrong twice. Increased expected inflation is good and expected inflation is barely increasing. When noting the first error, one shouldn't overlook the second.

1 comment:

Anonymous said...

What do you think about this?