Markets Tell the Fed Its Finally Getting an Edge on Inflation from freemexy's blog
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The $20 trillion U.S. Treasury market is giving the Federal Reserve a thumbs-up for its efforts to revive inflation after the coronavirus pandemic threatened to inflict a damaging bout of deflation on the U.S. economy.
A surge in gold prices above $2,000 and ounce and a weakening dollar have also focused attention on the outlook for inflation. If investors are betting price increases will accelerate, the hope is that consumers and companies spend enough for that to happen, given inflation is still well below the Feds 2% target. That goal has never been reached on a sustained basis since it was adopted in 2012.
But Fed officials are more worried about the economy running out of steam than overheating. Theyre warning Congress about the dangers of spending too little, not splurging too much.
There are already signs that the pickup in inflation pricing wont continue to accelerate at the same pace, and that means the Fed is likely to keep monetary policy loose -- perhaps even looser than now -- for years to come in the belief it can adjust if inflation suddenly surges.
The market signals are “exactly what the Federal Open Market Committee should want to see at this juncture when inflation expectations are too low and policy space is limited,” Evercore ISI vice chairman Krishna Guha wrote in a note to clients.
Ten-year breakeven rates –- which combine the yields on standard and inflation-linked Treasuries into a measure of what bond markets expect consumer prices to do -- have jumped to about 1.69%, from as low as 0.47% in March.
Actual consumer prices rose 1% in July from a year ago, pushing core inflation to a four-month high of 1.6%. And consumer expectations for inflation in three years time increased to 2.73%, the most in more than a year.
But economists generally saw the pickup as a reversal of distortions created by the virus lockdown, rather than a red flag. Fed Bank of Boston President Eric Rosengren agreed.
“It is very premature to be concerned about a significant increase in inflation,” Rosengren told Bloomberg Television. He said its “critically important” for Congress to provide more fiscal support for the economy.
The White House and Democratic leaders are arguing over how much additional money is needed. Key parts of the government rescue effort, like extra unemployment benefits, have begun to expire –- a potential drag on demand, just as a resurgent virus sets back efforts to reopen the economy.
The $20 trillion U.S. Treasury market is giving the Federal Reserve a thumbs-up for its efforts to revive inflation after the coronavirus pandemic threatened to inflict a damaging bout of deflation on the U.S. economy.
A surge in gold prices above $2,000 and ounce and a weakening dollar have also focused attention on the outlook for inflation. If investors are betting price increases will accelerate, the hope is that consumers and companies spend enough for that to happen, given inflation is still well below the Feds 2% target. That goal has never been reached on a sustained basis since it was adopted in 2012.
But Fed officials are more worried about the economy running out of steam than overheating. Theyre warning Congress about the dangers of spending too little, not splurging too much.
There are already signs that the pickup in inflation pricing wont continue to accelerate at the same pace, and that means the Fed is likely to keep monetary policy loose -- perhaps even looser than now -- for years to come in the belief it can adjust if inflation suddenly surges.
The market signals are “exactly what the Federal Open Market Committee should want to see at this juncture when inflation expectations are too low and policy space is limited,” Evercore ISI vice chairman Krishna Guha wrote in a note to clients.
Ten-year breakeven rates –- which combine the yields on standard and inflation-linked Treasuries into a measure of what bond markets expect consumer prices to do -- have jumped to about 1.69%, from as low as 0.47% in March.
Actual consumer prices rose 1% in July from a year ago, pushing core inflation to a four-month high of 1.6%. And consumer expectations for inflation in three years time increased to 2.73%, the most in more than a year.
But economists generally saw the pickup as a reversal of distortions created by the virus lockdown, rather than a red flag. Fed Bank of Boston President Eric Rosengren agreed.
“It is very premature to be concerned about a significant increase in inflation,” Rosengren told Bloomberg Television. He said its “critically important” for Congress to provide more fiscal support for the economy.
The White House and Democratic leaders are arguing over how much additional money is needed. Key parts of the government rescue effort, like extra unemployment benefits, have begun to expire –- a potential drag on demand, just as a resurgent virus sets back efforts to reopen the economy.
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