For quite some time the old-style monetarists have been warning that all this “easy money” (what would Milton say!) will produce high inflation, with long and variable lags. The recent passivity by the Fed has caused TIPS spreads to plummet in the last couple days. Today for the first time that I can recall the 30 year TIPS spread fell below 2%. Thirty years is a pretty long lag before that high inflation kicks in.
In fact, monetary policy works with leads, not lags. Markets are plunging right now on expectations that future monetary policy will be tight, will allow NGDP growth to fall well below even the woefully inadequate 4% of this “recovery.” The Fed has lost control of the nominal economy.
I hope all you hard money fans are happy—this is what hard money looks like.
Tags: TIPS spread