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Fiscal Policy and Expected Inflation

Despite U.S. fiscal problems, the Fed appears to still retain excellent inflation credibility with financial markets"¦ Although confidence in the Fed might explain the quiescence of inflation expectations, the structure of U.S. government debt may be more important"¦ [I]nflating away the U.S. debt simply would not work because a high proportion of the debt is in short-term or inflation-protected securities.