So Chairman Bernanke is dusting off his old "deflation playbook" and talking seriously about purchasing long-term Treasuries as a way to push long nominal rates lower. But nominal rates are already at record lows, and lowering them further seems only likely to widen spreads (and of course monetize the debt, which is one purpose of the action).
Meanwhile, the TIPS market is pricing very high real interest rates (what the Fed actually needs to lower) and, together with nominal bonds, problematic deflation. Some of this is due to TIPS' recent illiquidity but a fair part of it is a real fear by investors that deflation is not only possible but in the near-term probable.
Also, the Fed's forecast inflation has slipped towards the lower end of its supposed target range. Question: is there any good reason the Fed should not consider targeting TIPS, rather than nominal bonds, for its quantitative easing purchases? The Fed could kill two birds with one stone by buying TIPS and stating that they would buy them until 10y BEI was at least 2% (for example). Indeed, the Fed could even say that it would sell those bonds when BEI got to, say, 3% or 4%, thus pre-announcing when the Q-E would be unwound and providing a de facto inflation target.
Meanwhile, the TIPS market is pricing very high real interest rates (what the Fed actually needs to lower) and, together with nominal bonds, problematic deflation. Some of this is due to TIPS' recent illiquidity but a fair part of it is a real fear by investors that deflation is not only possible but in the near-term probable.
Also, the Fed's forecast inflation has slipped towards the lower end of its supposed target range. Question: is there any good reason the Fed should not consider targeting TIPS, rather than nominal bonds, for its quantitative easing purchases? The Fed could kill two birds with one stone by buying TIPS and stating that they would buy them until 10y BEI was at least 2% (for example). Indeed, the Fed could even say that it would sell those bonds when BEI got to, say, 3% or 4%, thus pre-announcing when the Q-E would be unwound and providing a de facto inflation target.
