Another reason Fed won’t launch QE3 While anal

Another reason Fed won’t launch QE3
While analysts focused on Federal Reserve Chairman Ben Bernanke’s comments in Congressional testimony on his outlooks on employment and Europe, there’s another key reason the Fed won’t engage in another round of quantitative easing, as so many expected, said Eric Green, global head of rates and FX research and strategy at TD Securities.

Put simply, “inflation signals are not compelling,” he said.

And that’s based on not just his personal research, but signals from the billions of dollars traded every day in the U.S. bond market.

The different in yields between regular 10-year notes and Treasury Inflation Protected Securities — considered a real-time gauge of investors’ inflation expectations — has fallen 0.2 percentage points from its recent highs, Green wrote in emailed comments Thursday. At 2.15%, it’s only 0.1 percentage points below its long-term average and 0.65 points above levels that signaled the Fed’s second round of quantitative easing.

“There is not a disinflation problem in the US. Yes, headline inflation will roll over toward 1.5% year-over-year over coming months, but that is energy base effects that will recede. Core inflation is and will remain around 2%,” he said.

That’s well above the pace seen before QE2.

Finally, longer-term inflation expectations in the TIPS market are also higher than they were before QE2 and trending higher, not lower, he said.

-Deborah Levine