Aug 16, 2010 06:12 PM

Inflation, Not Deflation, Mr. Bernanke


In the wake of a barrage of bad economic data, the yield on two-year U.S. treasury notes has tumbled to 0.5 percent and the 10-year note to 2.8 percent, almost reaching the levels after Lehman's collapse. Pundits in the U.S. and other Western countries are talking about deflation again. The decline in CPI for the past three months gives this view ammunition. The Fed is coming under pressure to resume quantitative easing (QE). In anticipation of the Fed resuming QE, nicknamed "QE 2," the dollar has declined quickly by 10 percent from its recent high. Both the treasury and currency markets have already priced in "QE 2." It just downgraded the U.S.'s economic outlook and decided to reinvest its proceeds from its huge mortgage bond holdings in treasuries. It is not quite "QE 2," as it doesn't involve additional QE, just maintaining the past liquidity injection. But it leaves much for the market to imagine.

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