While there is considerable disagreement among the market participants about the impact of ‘QE-Forever’ on the labor and the housing markets; one thing is quite clear—the Fed has decided that out of its dual mandate —to promote full employment and price stability— the first one takes precedence over the other, for now.
As a result of inflationary expectations, the bond market did not react positively to the QE announcement, though the purpose of the aggressive action by the Fed is to keep the interest rates low. On the other hand, gold and other precious metals (inflation hedges) moved higher. (Commodity ETFs in Focus as Fed Unleashes QE3)
Not long ago, people were worried about deflation in the US but the risks of deflation have almost disappeared now.
Market expectation for inflation over the next 10 years, as implied by the spread between the nominal and inflation-protected bonds, rose to 2.73% recently, its highest level since May 2006. (Two ETFs for the Muddle Through Economy)
Adding to the long-term inflationary concerns, was the CPI for the month of August, released a day after the QE3 announcement, which increased 0.6% —its largest rise since June 2009. Increase in energy prices accounted for a large part of the rise.
Do you think that inflation is becoming a risk now? And do you agree with the Fed’s strategy to risk inflation in order to support growth?
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