Thursday, September 27, 2012

QE3 and Inflation

One of the big fears of a program like the Federal Reserve's recently announced third round of quantitative easing is that pumping all that money into the economy will stoke fears of inflation. And indeed, immediately after Ben Bernanke announced the Fed's latest bond-buying effort, there was a bit of inflation frenzy. The spread between the ten-year Treasury bond and the ten-year Treasury Inflation-Protected Security (TIPS) - which should reflect what investors expect inflation to average over the next ten years - was at 2.38 percentage points before Bernanke's announcement.

After the announcement, though, the TIPS spread jumped to 2.67 percentage points. That's the highest that the spread had been since way back in May 2006, and the trajectory of the growth was a bit frightening.

But since that initial burst, the inflation spread has been declining. As of yesterday, the TIPS spread was back to just 2.44 percentage points. At this rate, before long it could be back to the pre-QE3 level.

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