Economists surveyed by the Securities Industry and Financial Markets Association do not see any risk of inflation indicators over the next 18 months, as unemployment rises and eases pressure on the Federal Reserve to raise interest rates.

While a low-inflation environment wouldn't have a specific implications for municipal bonds, low inflation means yields for fixed-income investors are more valuable, market participants said.

Jim Glassman, senior economist at JPMorgan Chase & Co., yesterday presented the results from SIFMA's biannual survey of its 21-member Economic Advisory Roundtable. The group polled the economists between May 27 and June 12 for their estimates on various economic measurements for the second half 2009 and 2010.

The consumer price index is expected to be 1.9% and 2.5% for the third and fourth quarters of 2009, according to the median estimate of the economists. CPI is projected to average 1.4% in 2010. The Fed's preferred measure of inflation, the core personal consumption expenditures price index, is expected to remain flat at 1.1% year-over-year through 2010, according to the survey.

Glassman said the Fed's massive $1.5 trillion gain to its balance sheet is not likely to be inflationary as unemployment increases.

"We continue to see further declines in inflation," he said. "The last time we saw unemployment at these levels was in the 1980s and it was that moment that saw unemployment come down quite a bit." The economists projected unemployment will grow to 9.8% in 2010 though payroll figures will start to increase next year.

Though the federal funds futures market is beginning to expect rate increases early next year, Glassman said Fed rate hikes won't occur until later in 2010.

Most of the economists polled "believe the Fed is going to keep policy fairly stable through next year," he said.

Glassman said the federal stimulus funds have made economic projections difficult. The economists expect real gross domestic product to increase 0.8% in the third quarter and 1.9% in the fourth quarter, more conservative than the Obama administration's forecast of 3.2% in 2010.

"We're in a moment where there is a lot of money going out," Glassman said. "We don't know how much and it is very hard to track." He estimated that $90 billion in stimulus funds will flow into the economy in the form of tax cuts and payments to seniors.

The economists projected monthly yields of 10 year Treasuries to be about 4.0% through June 2010. The recent increase in Treasury yields is an easing in "the flight-to-quality phenomenon" and not inflation, according to the survey.

State and local spending is expected to increase 1.7% in 2010 from a decline of 0.2% in 2009. Glassman said states are under pressure to balance their budgets and tax increases would not benefit the overall economy. It remains to be seen if stimulus funds will foster growth or be used by states to plug budget gaps, he said.

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