Uneasy Money

The front-page headline in today’s Financial Times reads “Inflation outlook on US lowest for a year.”  So obviously some people in the financial community and in the financial press are beginning to realize that what monetary policy does affects inflation expectations.

Market expectations for US inflation have dropped to their lowest level in a year and are now below the Federal Reserve’s unofficial target, as investors respond to the central bank’s latest attempt to stimulate the economy.

The expected rate of inflation over the next 30 years, as measured by the difference between Treasury Inflation Protected Securities, Tips, and cash government bonds, dropped as low as 1.85 per cent in recent days from 2.73 per cent since last month. The rate was just under 2 per cent on Tuesday.

The article goes on to note that inflation expectations dropped after the FOMC announced Operation Twist, as gold and oil prices dropped, quoting a Deutsche Bank economist that the TIPS market shows that the Fed’s policy “is no longer seen as inflationary.”

The good news is that people are starting to catch on to what Scott Sumner and a few other lonely voices have been trying to tell us since the financial crisis.  The bad news is that the FOMC doesn’t appear to be among them.

This will be my last post for several days, as I am about to observe the Jewish New Year.  Sorry to go on leave when things seem to be getting really interesting in the blogosphere, but there are some things even more important than monetary policy.  Did I really just say that?  My best wishes go out to all of you for a happy, healthy, and peaceful New Year.