Ben Bernanke has repeatedly said the Federal Reserve targets expected inflation. To that end, Bernanke has also said he looks at inflation breakeven rates using TIPS to measure expected inflation. The 10-year is a widely used benchmark in this regard.
As the chart below shows, the Federal Reserve has never initiated more accommodation when the TIPS inflation breakeven rate was above 2.0%. This level is important because the Federal Reserve adopted 2.0% as an inflation target last January.
When expected inflation is above 2.0%, it does not mean the FOMC has to tighten. But it can mean there is too much inflation to add more accommodation. Of course the Federal Reserve can decide to ignore this target, but since they adopted it less than a year ago, they risk their own credibility in doing so.
This might be the big stumbling block to QE3.
Source: Bianco Research
http://www.ritholtz.com/blog/2012/08/whats-the-holdup-with-qe3/?utm_source=dlvr.it&utm_medium=twitter
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