And now for something completely different: I’m a bit puzzled by the tone of this FT report on how QE3 is doing so far, US inflation fears rise after QE3, which seems to imply that a rise in breakeven rates — the difference between the interest rate on ordinary bonds and inflation-protected bonds — is a danger sign. (Breakeven rates are a simple gauge of expected inflation).
On the contrary, it’s the whole point of the exercise. For almost fifteen years, some of us have argued that central banks can gain traction even in a liquidity trap if they can create expectations that money will remain loose after the economy recovers, generating modestly higher inflation. And that’s what the Fed’s new tack is supposed to achieve.
The right headline on that FT article should have been “QE3 working so far”.