/Quick Point/ – Fed Succeeds by Talking – Growing Signs of Inflation

Monday, October 25, 2010

The Federal Reserve (Chair Ben Bernanke, in particular) would like a tad more inflation and thinks its plan to buy bonds could accomplish that goal. Now there are signs that just talking about it has done the trick. Here are three examples:

First, the US bond market’s pricing:

“Expectations for rising consumer prices have increased faster in the U.S. than any other bond market this month as central bankers made the case for monetary easing through additional asset purchases.”

“Deflation Disappears With Bond Market Showing No Double Dip” (Bloomberg, by Daniel Kruger, October 25)

Second, commodities pricing:

“The Fed, according to some analysts, has inflated the commodities markets by raising the prospect of a new wave of quantitative easing – in effect, printing money – to try to stimulate US recovery.”

“Runaway commodity prices reach highs” (FT.com/Financial Times, by Jack Farchy, October 22)

Third, company pricing:

[McDonalds] expects to increase prices in the U.S. and Europe amid projections that commodity costs will rise between 2% and 3% in 2011….”

“McDonald’s Intends to Raise Prices” (The Wall Street Journal, by Paul Ziobro, October 22)

So… “Jawboning,” a typically ineffective Fed strategy, may be working this time. Now, if only we could be assured that any inflation pickup will remain small.

A /Quick Point/ is an observation relevant to current investment trends and recent Investment Directions’ articles.

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John Tobey on Seeking Alpha

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October 2010