Even though current inflation is running at 3.6% annually, it’s probably true that inflation is going to be held down near-term by a very weak U.S. economy. Here is the Reuters report on the ‘transient’ inflation issue:

http://www.reuters.com/resources_v2/flash/video_embed.swf?videoId=216213419

Slower economic growth. Quoting the Boston Globe:

The Fed said the economy was expanding less quickly than it had predicted. It now projects a growth rate of 2.7 percent to 2.9 percent in 2011, and 3.3 percent to 3.7 percent in 2012. Both estimates are markedly below its previous forecast in April.

End of quantitative easing. Even though recovery is slower than everyone wants, Bernanke did not announce any new Fed plans to boost the economy. No QE3 looks likely, quoting Dow Jones:

Federal Reserve Chairman Ben Bernanke Wednesday quashed speculation about another round of stimulative bond purchases, boosting the dollar. … The market took Bernanke’s comments as a sign of “deep reluctance to go down the road of QE3,” said Paresh Upadhyaya, director of G10 FX Strategy at Bank of America-Merrill Lynch in New York.

This is important for investors in TIPS, because the Fed purchases  have helped lower TIPS yields to historic lows.

Jobs picture won’t improve quickly. From ABC News:

Bernanke said it’s “very frustrating” that the U.S. is still some years away from full employment.  “At some point, if growth picks up as we anticipate, job numbers will start getting better. We’re still some years away from full employment in the sense of 5 1/2 percent, say.

U.S. inflation is not likely to get overheated without job growth and wage increases, which would also … trust me … result in an immediate rebound in the U.S. housing market. None of this is in our near-term future.

Stock market = not pleased. Stocks dropped sharply after the Federal Reserve cut its forecasts for U.S. economic growth this year and next, without hinting at further plans for stimulus.

TIPS market = slight indigestion. Normally, U.S. Treasuries perform well during times when the stock market is suffering and the economy looks weak. TIPS are a little more complex, though, because TIPS perform well when there is a higher fear of inflation.

Bernanke was doing his best today to shut down the fear of inflation.

The iShares TIP ETF was down 0.23% today. That isn’t significant. But if inflation fears really do subside, the TIP ETF could suffer.