Now that the Fed essentially initiated a fourth quantitative easing (QE4) at its December meeting by voting to continue its monthly bond-buying programs, Bill Gross and others are becoming inflation hawks.
Gross says the long-term price tag for the unprecedented monetary easings is inflation and currency devaluation.
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This can affect the measurement of long-term bond yields, which has Gross advising investors to stick with short bond maturities and durations and align intermediate maturities with targets supported by Fed policy.
At some point, demand in the economy will increase, companies will want to borrow, and banks will once again lend aggressively.
That’s when the increase in money will start to raise prices and the Fed will need to limit banks’ ability to create credit by raising interest rates.
That’s the so-called exit strategy the Fed has in mind but Gross says no one knows how high interest rates will have to go to reign in commercial banks.
The recent release of the minutes of the Fed’s December minutes show that even Fed officials are concerned that monetary policy may already be too easy.
Global central banks may continue to pump money into emerging economies
, setting up even riskier potential down the road.
With the global recession, a greater portion of the world is in lower income brackets and higher food and energy costs can be difficult to absorb.