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Credit Insights

If a Little Is Good, More Must Be Better

As the Fed is flooding the markets with liquidity, market-implied inflation expectations soar higher.

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The Fed announced last week it would purchase outright $45 billion of long-term Treasuries after Operation Twist ends. In addition, it eliminated the calendar date guidance on how long it anticipated keeping interest rates at zero. Instead, it replaced the calendar date with an unemployment target of 6.5% as long as one- to two-year inflation projections are below 2.5%.

Based on the Federal Open Market Committee's current projections, unemployment would decline to that level sometime in the first half of 2015. If the Fed were to purchase $45 billion of Treasuries and $40 billion of mortgage-backed securities through then, it will increase its holdings by approximately $2.5 trillion, nearly doubling the size of its current balance sheet.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.