The Federal Reserve will begin a new round of large-scale asset purchases to give the U.S. economy a boost, said Richard Berner, co-head of global economics at Morgan Stanley in New York.
“We’re skeptical that you get a lot of bang for the buck because there are a lot of blockages in the transmission channel for monetary policy,” Berner said during a radio interview on “Bloomberg Surveillance” with Tom Keene. “Nonetheless, with gridlock persisting elsewhere in the policy environment, it just seems to us like QE2 is inevitable.”
Markets have already priced in a second round of large- scale asset purchases, also known as quantitative easing, after being “frozen” when Congress took no action on the Bush-era tax cuts, Berner said.
Inflation expectations have risen since Fed Chairman Ben S. Bernanke spoke in Jackson Hole, Wyoming, in August, according to Berner. Bernanke said the Federal Open Market Committee “will strongly resist deviations from price stability in the downward direction,” and “will do all that it can to ensure continuation of the economic recovery.”
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 1.80 percentage points from 1.67 on Sept. 3. The figure is still less than the five-year average of 2.10 percentage points.
“The Fed really does want to make sure that inflation expectations are high enough so they influence the actual inflation over time,” Berner said.
A weaker dollar will also support U.S. growth and help to limit the risk of deflation, Berner said.
“Right now, interest rates are becoming increasingly an instrument of monetary policy rather than something that is determined by inflation growth and the risk of holding longer- term securities,” Berner said. “When that unwinds, it means a fairly substantial change in the prices of Treasury securities.”
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