Powell Aims to Avoid Japan Deflation Trap With Dovish Tilt
Comment of the Day

March 21 2019

Commentary by Eoin Treacy

Powell Aims to Avoid Japan Deflation Trap With Dovish Tilt

This article by Rich Miller and Craig Torres for Bloomberg may be of interest to subscribers. Here is a section:

That’s the type of situation that Japan fell into two decades ago and with which Europe is flirting now. It’s a path that could ultimately lead to a deflationary downturn as households and businesses put off borrowing and spending today because they’re convinced prices will be lower tomorrow, no matter how far the central bank lowers interest rates.

“We are not getting any inflation and the risk is that we find out -- as did Europe and Japan -- that we are stuck and that the central bank isn’t able to raise inflation,” said Mark Spindel, chief investment officer at Potomac River Capital in Washington.

The Fed hasn’t hit 2 percent inflation on a sustained basis since formally adopting that objective in 2012. In December, the personal consumption expenditures price index that the Fed targets rose 1.7 percent from a year earlier.

The extra yield investors demand to hold 10-year Treasuries over two-year notes was 13 basis points, highlighting market conviction that inflation will stay subdued over the next decade.

Eoin Treacy's view

The Fed has stated in the last week they are willing to let inflation run hot in order to create a self-sustaining trend which suggests we are likely to have an easy monetary environment for the foreseeable future.

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