Treasuries because they're a safe bet in uncertain times. Once the global economy returns to growth, however, investors who are worried that inflation will erode the value of their investments may demand higher returns for purchasing U.S. Treasuries. That could force up interest rates, snuffing the recovery.
By next year, the Obama administration and the Fed may have to choose between higher inflation and fewer jobs.
"Success in public policy ... is defined by jobs and not price stability. Therefore both domestic and foreign investors are concerned that even slightly higher inflation will be accepted by public policy makers in an attempt to provide a few more jobs," John Silvia, the chief economist for Wachovia, wrote in a June 29 research paper.
The Fed raises interest rates to tame inflation, at the expense of economic growth. President Barack Obama has refused on several occasions to say whether he'll reappoint Ben Bernanke to another term as Fed chairman; Bernanke's current term expires Jan. 31. The uncertain outlook for who will helm the Fed is adding to the anxiety that inflation may be permitted to rekindle over the next few years.
"Our basic expectation ... is that inflation will rise and the dollar will decline in value as the economic stimulus programs remain in place just a bit too long to be comfortable for investors," Silvia wrote.
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ON THE WEB
Silvia's analysis: "Credit Cycle: Breakdown, Adjustment and Rebuilding in the Financial Sector:
http://tinyurl.com/ly8gxw
The Securities Industry and Financial Markets Association's midyear forecast:
http://www.sifma.org/research/pdf/EconOutlook0609.pdf
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