Market-based inflation expectations moved a bit higher

Having returned from a walk in France, I see in my inbox some references to this theme, and here is a story on Bloomberg covering the same.

One of the interviewers in the video cannot read her own chart, obviously. And I have noticed that the staff at Bloomberg UK generally don’t speak American very well. Bit late for Empire, lads.*  But the chart itself is straightforward.

I would say this is a desired outcome. The markets had the view that the Fed was aiming to cap inflation at the 2% target, which would imply an average inflation rate through the cycle of less than 2%. Here is my umpteenth reiteration of that idea.

But at some risk of reading my own priors in too much, I think the Fed is signaling with rhetoric and (in) action that they would would prefer to aim at (and not just tolerate the risk of) above-2% inflation in the late cycle.

That would be consistent with their hitting their formally-stated objective; and markets have begun to react to that. I would guess this has a bit further to go, although one’s confidence in a further move declines as the move progresses, I guess.

The rate path consistent with the Fed delivering this result is a separate issue: it is about the means, rather than the ends, as I see it.  My bias is dovish, but I think it has been useful to distinguish between what the market prices (relevant) and the hawk-biased anchoring of the talking heads (less relevant).

As I see it, the hurdle is the market, and it has understandably been ignoring the Fed watchers for a while and certainly incorporates a bunch of dovish arguments. So I will again take Dr. Evil’s advice. On the Fed path, Zip It!

Somewhat separately, I see Goldman emphasizing the distinction between market-based measures of inflation expectations and the UMich survey measure. Inflation expectations in the real economy are probably more important than in the financial markets as they are much more likely to be self-fulfilling.  But they probably are more a function of long-trailing inflation expectations than of the speculations made in the bond market.  I guess this combination, would net net be dovish for rates, but again, Zip It!


* The part where the uppity English rely on reconnecting with the dominions is a bit of a joke. Britain was a nice connection when it was docile, sinking quietly into senescence, and reminded us of our beloved grandparents. But we certainly did not expect — and will not allow — you to actually do something involving us. The only reason we keep your queen is inertia combined with horror at observing a president. It is best for the person absorbing expressions of national pride to be irrelevant, to take the moral pressure off the people actually running the country.