raders' inflation outlook falls toward financial-crisis lows

`Lack of faith in monetary policy,' according to State Street

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More and more, bond traders are drawing the same conclusion: central bankers globally are coming up short in their attempts to combat the world's economic woes.

Even after hundreds of interest-rate cuts and trillions of dollars in quantitative easing, the bond market's outlook for inflation worldwide is approaching lows last seen during the financial crisis. In the U.S., Europe, U.K., and Japan, those expectations are now weaker than they were before their respective central banks began their last rounds of bond buying.

That's leading investors to write off the Federal Reserve's chances of raising interest rates this year and increase their bets that it will tighten less than policy makers forecast in the years to come. Speculation has also increased that the European Central Bank and Bank of Japan will need to step up their quantitative easing in the face of deflationary pressures, despite statements to the contrary from their own officials.

"There's a lack of faith in monetary policy -- you've thrown the kitchen sink at it, you've cut rates to zero, you're printing money -- and still inflation is lower," said Lee Ferridge, the head of macro strategy for North America at State Street Corp. "It leads to a risk-off environment."

Recent economic reports have renewed calls for major central banks to do more. Consumer prices in the euro region unexpectedly fell, deflation re-emerged in Japan, while wages in the U.S. stagnated yet again. International Monetary Fund Managing Director Christine Lagarde also signaled the organization is preparing to lower its outlook for the world economy.