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Jan 11, 201306:08 AMVan Lines

with Joe Vanden Plas

Why Inflation Is No Concern … for Now

Why Inflation Is No Concern … for Now

(page 1 of 2)

Fed Chairman Ben Bernanke’s latest round of quantitative easing has some worried the inflation genie will be unleashed. Having lived through “The Great Inflation” of the 1970s, this would be quite a revolting development.

Two episodes of quantitative easing – a monetary policy of purchasing government and other securities – and the more recent program of asset purchasing have given rise to our inflationary nightmares. But one of the most reassuring bits of insight during the 2012 IB Expo came from Jim Glassman, managing director and senior economist for JPMorgan Chase, who told those assembled that “QE” is not the least bit inflationary.

As Glassman explained, the Fed normally drives short-term rates up or down, depending on economic conditions. Since it already has interest rates near zero, the economy needed other kinds of support, and that support comes from driving down other rates through the purchasing of assets like Treasuries and mortgage-backed securities. 

“The real impact of what the Fed is doing is to drive risk-free rates down,” Glassman said. “It’s a very unusual thing, and it’s not going to go on forever. The Fed will have to unwind this as the economy starts doing better.”

Better is a relative term, but Glassman is already seeing benefits from the Fed’s nontraditional actions. For example, the spreads on asset-backed securities on subprime car loans made to borrowers who are higher credit risks have come back to where they were prior to the recession because investors are seeking higher returns in other kinds of assets. As a result, subprime car loans are growing twice as fast as regular car loans, and that is boosting auto sales. 

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