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Should Investors Worry About Inflation?

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  • Description

    RBS Head of Treasury strategist William O'Donnell gives his outlook for inflation.

  • Duration 3:13
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This transcript is automatically generated

The -- reserve is pumping out more cheap money care of QE there -- But is there a dark side to all of this stimulus William O'Donnell has.

The treasury strategist at RBS joins me now to weigh in -- -- you get so -- consumers -- -- be worried about inflation.

Well.

We are seeing deepening concerns about inflation since the Fed's QE3 announcement.

Some days ago.

And the way we see it is really.

Eight you know best exemplified by the tips market as well as the treasury yield curve itself especially in the five year the thirty year sector of the -- We -- generally steepening curve we -- sharply rising tips.

Breakeven rates.

And into our authentic -- rising inflation is steepening curve near seeing higher rates come up with a longer and yes and I think I think it's important for the viewers.

It to know that it's not rising inflation but is rising inflation expectations.

And that are driving curve steeper and tips breakevens up.

So -- inflation you hear that word.

As a consumer and you automatically -- because you think gas prices food prices.

But in reality -- help me clarified if the economy does need a certain amount of inflation to continue to ground.

Yes and the Fed's trying to achieve that they have sort of -- I guess it's a soft target of around 2%.

We're below that target that's one of the reasons did they they of course have a dual mandate.

Why they acted as they did by announcing QE3 and additional asset purchases.

But what's going on the investor community and and I think what shocked them.

Was the revelation.

During.

You know at the press conference Bernanke's press conference after the last.

FOMC meeting.

That the dual mandates you know inflation and growth that everybody thought were -- -- -- are no longer equal because the Fed seems to be it -- or -- explicitly -- Employment targeting.

So people are assuming from that if they -- target employment.

It's going to be a big expense or cost of something and and investors are assuming that's going to be future inflation and that's the fear today.

So what should we be thinking in terms of inflation which is had air -- -- in the Fed official on saying that he believes the Fed.

The -- accommodate accommodative action already is having a positive impact on the housing market we know that house prices are on track actually show a gain this year vs -- decline last year.

Wage inflation that was basically flat falling slightly so are you concerned that or not concerned that the pace of inflation is on track to -- overall overall beneficial.

What Boston fed president -- -- -- didn't say there weren't any cost of their actions.

What he simply said was the benefits in his view we're likely to outweigh the costs.

But the difficulty for treasury investors this we're very close to generational lows that yields or risk compensation if you will.

And as a result of the Fed's willing to get it to get a little bit more inflation -- planned to.

Relative to great games and let's say the housing market that's fine for the Fed.

But it's what I think for treasury and gestured with the you know sub 2% ten year yields are right -- out thanks thanks so much as.

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