The Bank of England expanded the scope of its bond-buying program by purchasing inflation-linked Gilts.
Our view is that the BoE will stay in the bond market somewhat permanently and will ignore its self-imposed QE deadline of October 14th. Our view is that the U.K. will be dealing with Stagflation for years to come given its loose monetary policy which will ensure elevated prices, high Government debt levels and muted GDP.
The Fed is in a similar boat with the U.S. economy. If the U.S. credit markets were to seize, the Fed would likely pause its tightening cycle and restart QE. In addition, if unemployment were to get high enough (6-8%?), we could imagine the Fed pausing its tightening effort and restarting QE. In any event, the Fed will remain steadfast for longer than many investors believe, but not long enough to kill inflation. The long-term U.S. economic backdrop includes elevated prices (3-4% CPI rather than 1-2%), high Government debt levels and muted GDP.