Commentary: Markets expect low inflation for next 30 years
You wouldn't know it from all the criticism being heaped upon the Federal Reserve, but confidence in the Fed has rarely been greater.
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Not political confidence. That's never been lower. The Republican Party's leaders, from Rush Limbaugh and Sarah Palin all the way down to Mitch McConnell and John Boehner, escalated their Cold War against the Fed this week, with a not-too-subtle threat to put a tight leash on the Fed's independent economic policy making.
Incredibly, the Republicans are worried that the Fed is putting too much emphasis on attacking unemployment! With the official jobless rate at 9.6% and the underemployment rate at 17%, apparently the Fed has just been too vigilant. These Republicans would like to rewrite the Fed's charter so it doesn't pay any attention to economic growth at all. Read more about the political pressure on the Fed.
Foreign leaders from China and Germany also blasted the Fed's latest moves to keep the U.S. economy growing by buying $600 billion in long-term Treasurys.
While many of the critiques of our central bankers are legitimate and serious disagreements about how effective the policies will be, or what the long-term unintended consequences of them might be, or who'll be the winners and who'll be the losers, much of criticism of the Fed is purely political. It's based on short-term self interest.
China, Germany and the Republican Party each believe they'll be stronger if the American economy is weaker. (They are wrong, but they believe it anyway.) Of course they want the Fed to fail.
Politically, the Fed is under siege.
No, it's not political confidence that's abundant. What I'm talking about is the market's confidence in the Fed. The market has never been so sure that the Fed will win the war against inflation.
Despite all the worries about the bloated balance sheet, the quantitative easing, the non-stop printing presses and the helicopter drops, despite the warnings that the Fed is locking us into a bleak future of hyperinflation, the market actually expects very tame inflation for a very long time.
The market gyrations since Nov. 3 when the Fed announced its quantitative easing policy don't alter that conclusion. Even with some big daily moves in bond prices in the past week or two, the market still expects that inflation over the next five years will be under 1.5% a year. All the market has done since Nov. 3 is price in less risk of deflation.
According to the Cleveland Fed's latest analysis of inflation expectations, the public — markets and professional forecasters alike — expects that consumer prices will go up less than 2% annually not just this year, or next year, but for the next 30 years. It's the lowest expected inflation on record (dating back 28 years). Read the report on inflation expectations.
We can't know for sure what will happen to inflation rates. Markets certainly don't get everything right. The market could be wrong now to expect low inflation just as it was wrong in the 1980s to expect high inflation forever. Just because the markets say one thing doesn't make it so. We could have high inflation rates, and soon.
But if the market is expecting low inflation, you can't argue that the market is expecting high inflation. The bond vigilantes don't exist.
Remember, that the austerity demanded by the politicians and pundits on the right is based largely on the argument that investors will revolt against America because they fear high inflation. If the Fed eases monetary policy any further, inflation will get out of hand, they warn. If the federal government tries to spend any more money in this depressed economy, investors will stop buying our debt out of fear of inflation.
And if that happens, if bond prices collapse, America could default on its debt, they say.
If the government does any more, the austerity crowd preaches, we'll become Zimbabwe, with its 1,000% inflation rate. Or we'll be Greece, with European overlords dictating to us.
However, investors have voted on the austerity party's fears, and the result is an overwhelming repudiation of them. The market is not demanding austerity.
Rex Nutting is a Washington columnist for Marketwatch.