Did Bernanke just make a mistake? I think he might have. In a speech in Frankfurt he had this to say about his (and the rest of the Fed’s) thinking on inflation:
The Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate.
This sentence is open to some fairly wide interpretation. I think Ben was referring to inflation as something that is evaluated over an extended period of time and is best measured by the GDP deflator.
But that is not how the market may read it in a few months. A CPI print of .3 or even a .4 is not at all out of the cards at some point over the next Q. Multiply .3 X 12 and you get a running rate for inflation at 3.6%. While that is not what our boy Ben may have meant, that is how the market will read it. Ben has put out to the market that he might call off QE if inflation starts to get going toward 2%. He was pretty clear that he was prepared to back off in the speech:
The Committee stated that it would review its asset-purchase program regularly in light of incoming information and would adjust the program as needed to meet its objectives.
For me, it's a sure thing that we are going to see hot inflation prints in the next few months. There has been too much action in the broad commodities market for it not to show up. When it does people are going to be looking to Ben and calling his bluff. I read this comment by Ben as backing off. I would not be a buyer of long duration.
