The latest inflation reports tied to consumer spending give Federal Reserve Chairman Ben Bernanke a green light to consider stepping up asset purchases, or quantitative easing.
Today’s Commerce Department report showed that a measure of prices tied to spending advanced 1.7 percent in October from the same month last year, less than the Fed’s long-run goal of 2 percent. Excluding food and energy costs, the price gauge increased 1.6 percent from a year earlier.
“Some Fed members think they should keep easing one way or another unless the” measure of inflation tied to expenditures “rises above 2.5 percent,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
“One thing for certain is that inflation is dead,” Rupkey said. “The slower growth picture right now makes the case for the Fed replacing the expiring $45 billion purchases side of QE Twist with outright purchases of Treasuries, across the curve, when it meets” Dec. 11-12.
The central bank each month is swapping $45 billion in short-term Treasuries for longer-term debt in a program called Operation Twist scheduled to end in December. A number of Fed officials have said monthly purchases of bonds may be expanded next year after Twist ends, according to minutes of their Oct. 23-24 meeting.
Jim O’Sullivan, chief U.S. economist with High Frequency Economics, Ltd. in Valhalla, New York, said today’s benign inflation report may help on that front.
“The tameness in inflation, combined with contained inflation expectations, increases the likelihood that Fed officials will expand QE3 to include Treasuries when Operation Twist concludes at year-end,” he said.