"But, apparently, for those who are sufficiently hawkish, the recent activities of the [Fed] conjure up visions of inflation. ... Yes, these moves are unusual, but these are unusual times. Concluding that the Fed is leading us into inflation assumes a degree of incompetence that I simply don't buy. Let me explain. First, the clear and present danger, both now and for the next year or two, is not inflation but deflation. Using the 12-month change in the [CPI] as the measure, inflation has now been negative for three consecutive months. ... But history teaches us that weak economies drag down inflation--and ours will be weak for some time. Core inflation near zero, or even negative, is a live possibility for 2010 or 2011. ... Ben S. Bernanke, the Fed chairman, is a keen student of the 1930s, and he and his colleagues have been working overtime to dodge the deflation bullet. ... The mountain of reserves on banks' balance sheets has, in turn, filled the inflation hawks with apprehension. But their concerns are misplaced. ... The Fed is well aware of the exit problem. It is planning for it, it is competent enough to carry out its responsibilities and has committed itself to an inflation target of just under 2 percent. Of course, none of that assures us that the Fed will hit the bull's-eye. It might miss and produce, say inflation of 3 percent or 4 percent at the end of the crisis--but not 8 or 10 percent. ... SKEPTICAL? Then let's see what the bond market vigilantes really think. The market's implied forecast of future inflation is indicated by the difference between the nominal interest rates of regular Treasury debt and the corresponding real interest rates on ... TIPS. ... But on Friday, the five-year expected inflation rate was about 1.6 percent and the 10-yerar expected rate was about 1.9 percent", original capitals, my emphasis, Alan Blinder (AB) at the NYT, 21 June 2009, link: http://www.nytimes.com/2009/06/21/business/economy/21view.html.
"In contrast the Fed wants us to believe that there is so much 'slack' in the economy--economists call this the output gap--that there is nothing to worry about, inflation won't happen. What the Fed and the ECB have in common is a 'trust us' attitude, telling us that as long as we put our faith into the mighty hands of central bankers, we will be fine. And that's where the fundamental problem lies: rational investors ought to make investment decisions based on an evaluation of facts, not based on nice talk by central bankers. ... Don't understimate the Fed, though: unless the public and foreign lenders completely lose confidence in the Fed, it has the power to control inflation expectations in the medium term. ... The real question, however, is whether the Fed is going to follow through on its promise to keep inflation in check. ... The Fed may actually want to have inflation push up home prices. ... In our assessment, the scenario the Fed would favor is a prolonged period of elevated inflation; some estimates are from 4% up to 7% or 8%; others higher", my emphasis, Axel Merk (AM) 24 June 2009, link: http://www.financialsense.com/fsu/editorials/merk/2009/0624.html.