Inflation Will Ebb as Fed Plan Ends, Goncalves Says: Tom Keene

Inflation will stabilize without sliding into deflation after the Federal Reserve’s program to spur growth by purchasing $600 billion of Treasuries concludes tomorrow, according to Nomura Holdings Inc.’s George Goncalves.

Commodity prices will decline as the program, the second round of a strategy called quantitative easing, ends on schedule, Goncalves, Nomura’s head of interest-rate strategy in New York, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. The effort, which began in November, helped push commodities higher, he said.

“As that money stops growing, as the Fed’s balance sheet stabilizes as of tomorrow, I think that will take away some of the inflation pressures,” Goncalves said. “We’re not calling for double dip, we’re not calling for real disinflation, but lower inflation, sure, and that’s a good thing.”

The Standard & Poor’s GSCI Index of 24 raw materials rose to a 2011 high of 760.33 on April 8, from 465.46 in May 2010. It was 670.67 today, after touching a five-month low of 635.27 on June 27. Crude oil reached a 31-month high of $114.83 in May. Crude for August delivery traded at $95.07 a barrel in New York today, up 2.4 percent from yesterday.

The U.S. consumer price index increased 3.6 percent last month from May 2010, Labor Department data showed on June 15. It was the biggest year-over-year advance since October 2008.

If Nomura’s outlook is wrong and the U.S. economy starts to drop, it still will not reach deflationary levels because the Fed will step in, Goncalves said.

“We don’t believe in QE3 -- we’ve been very vocal on that as well -- but if we’re wrong and if the economy actually does start to dip down into the second half of the year and into the start of 2012, the Fed will pull out all the stops again,” Goncalves said.

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