Dallas Federal Reserve Bank President Warns Of Increased Inflation Fears, Citing Widening Spreads Between10-Year Note And TIPS

Thursday, September 20, 2012 06:53
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Dallas Federal Reserve Bank President Warns Of Increased Inflation Fears, Citing Widening Spreads Between10-Year Note And TIPS

Tags: Federal Reserve | inflation | U.S. economy

Dallas Federal Reserve Bank president Richard Fisher is the latest critic of the Fed’s decision to implement QE3, saying the increased bond purchases will do nothing to help the job market and will incite the rise of inflation.

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He thinks the stimulus efforts are getting out of hand and notes the increase in inflation expectations since the action was announced.
 
Fisher is one of the governors sitting on the sidelines this year so he did not vote on the decision by the Federal Open Market Committee (FOMC) meeting to go ahead with the easing. Only five of the 12 Federal Reserve Bank presidents have voting rights along with the seven FOMC members.
 
The president of the Federal Reserve Bank of New York always gets a vote and the others rotate one-year terms with voting rights.
 
Fisher makes the point that a rising inflation scenario would bring into question Bernanke’s commitment to keeping interest rates low while jump-starting the economy.
 
He says markets are getting nervous about the inflation factor. He points to the widening of the yield spread between the 10-year Treasury note and the 10-year TIPS (Treasury Inflation Protected Securities) as evidence.
 
The spread is a measure of traders’ expectations for consumer prices over the life of the debt. It widened to a four year high on the day after the QE3 announcement, to 2.67%.
 
Inflation at present, however, seems under control. Fisher says the situation will have to be very closely monitored. Fisher has been a dissenting voice in many of the Fed’s decisions to ease policy, but admits the housing market is showing promising signs of life.

 

 

The trick will be to manage market expectations with clear communications, something Fed chief Ben Bernanke has stated as a goal but which he has had little success in doing, at least in terms of making the details of policy decisions more transparent.

 

Managing the expectations of the marketplace with clear, transparent communications will help keep market fears from becoming a self-fulfilling reality.

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