“This is not a fluke: almost all of the underlying determinants of inflation point to weakness,” writes BofA Merrill Lynch economist Ethan Harris in a note to clients today.
For all of the talk of rising government bond yields and predictions for when the Federal Reserve will taper back its bond buying, Harris says, deflation is still a bigger risk than higher inflation – and disinflation could cause the Fed to actually ramp up QE if it continues.
Harris says he expects that “inflation bounces around the Fed’s 2% target, with no clear trend over the next two years,” but warns:
However, if recent trends continue, we will have to revisit that forecast.
If this downdraft sticks, it has important implications for the long-awaited bond sell-off.
Lower inflation should not only put downward pressure on breakevens, it will encourage the Fed to stick to its QE program longer. If outright deflation threatens, the Fed could even ramp up its program.
More QE – imagine that.
Full article: BANK OF AMERICA: ‘This Is Not A Fluke’ — The Fed May Have To Ramp Up QE Again (Business Insider)