When is success not success? When Fed gets inflation down to 2.5%: McGeever
By Jamie McGeever
ORLANDO, Florida (Reuters) -If signals from the U.S. bond market prove accurate, the Fed will be successful in getting inflation down to a '2 handle'. Just not its 2% target.
Moves in bond yields, implied inflation breakeven rates, and inflation-adjusted 'real' yields suggest investors anticipate the Fed's 'higher for longer' interest rate policy will help lower inflation to around 2.5%.
The moves currently underfoot in the bond market are dramatic. But this is not a re-pricing of the Fed's near-term trajectory, rather a repricing of the longer term economic and inflation outlook.
Annual consumer price inflation around 2.5% could legitimately be considered a success — it was 9% in June last year — especially if the hallowed economic soft landing is achieved and a painful recession is avoided.
Policymakers would probably bite your hand off for that scenario but never admit it. They will insist policy be set to get inflation down to 2% which, crucially for markets, implies there will be no easing, as investors had long expected.
«The risk of inflation staying higher than where we want it is the bigger risk. We ought to have 100% commitment that we're going to get inflation back to target,» Chicago Fed President Austan Goolsbee told CNBC on Monday.
This suggests the Fed is entering a phase of structurally higher rates than perhaps policymakers themselves, and certainly investors, had anticipated.
What is curious about this is the bond market appears to accept that the economy will remain relatively hot and policy will stay restrictive for longer, yet is unconvinced inflation will get down to 2%.
Many analysts are skeptical that moves in bond yields can be broken down, quantified and compartmentalized
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