By Jon Hilsenrath
Federal Reserve Chairman Ben Bernanke will be getting all of the attention Wednesday when he holds his first ever post-Fed-meeting press conference. But don’t forget the statement that the entire Fed policy committee will issue nearly two hours before the chairman utters a word. That meeting statement, due at 12:30, will set the tone for the press conference.
One key passage worth watching is the Fed’s description of long-term inflation expectations. After Fed officials met on March 15, they said this:
“Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.”
Will the policy makers be as comfortable this week about long-run inflation expectations as they were then? Trading in inflation-protected Treasury bonds suggests investors are expecting a little more inflation in the long-run than they were.
This chart, for example, shows how much inflation investors expect in the five years between 2016 and 2020, based on calculations that grow out of a 2008 Fed research paper.
It’s not an alarming rise and the latest downward drift should comfort some officials
Over a longer stretch of time, it doesn’t like much of a big move:
Still, it does look like long-run inflation expectations are creeping up, and this may make some Fed officials uncomfortable. “It will definitely raise some eyebrows around the FOMC table and reinforce concerns about upside risks to the inflation outlook,” says Laurence Meyer, of Macroeconomic Advisers LLC, a former Fed governor. Michael Pond, a bond strategist at Barclays Capital who follows expectations closely, has a similar take: “It may be a little bit above its previous highs on our measure but not dramatically so.”
The worry is that if people’s expectations for future inflation move up, they could become a self-fulfilling prophesy. The Fed’s vice chair, Janet Yellen, in recent comments in New York, described expectations as “reasonably well anchored.” Perhaps that’s a clue about how the Fed will treat the question in its post-meeting statement, not alarmed but not completely comfortable either. (Read her full remarks.)
As the following excerpts from Ms. Yellen’s comments suggest, the underlying message is that the Fed is watching inflation expectations very carefully:
In this regard, surveys and financial market data indicate that longer-run inflation expectations remain reasonably well anchored even though near-term inflation expectations have jumped in the wake of the surge in commodity prices. For example, the Thomson Reuters/ University of Michigan Survey of Consumers indicates that median inflation expectations for the coming year moved up about 1-1/4 percentage points in March, whereas the median expectation for inflation over the next 5 to 10 years increased only 1/4 percentage point. While such movements obviously bear watching, I would note that such a combination–namely, a substantial jump in near-term inflation expectations coupled with a relatively modest uptick in longer-run expectations–has often accompanied previous sharp increases in gasoline prices, and when it did, those movements were largely reversed within a few months.
Information derived from the Treasury inflation-protected securities (TIPS) market also suggests that financial market participants’ longer-term inflation expectations remain well anchored even as the near-term outlook for inflation has shifted upward. In particular, while the carry-adjusted measure of inflation compensation for the next five years has increased about 1/4 percentage point since earlier this year, forward inflation compensation at longer horizons is roughly unchanged on net. Much of the increase in five-year inflation compensation has been associated with the surge in food and energy prices, and the level of this measure appears consistent with a normal cyclical recovery after adjusting for those effects.
This all matters, because if the Fed starts to think that long-run inflation expectations are moving up too much, it could prod the central bank toward a faster exit from its easy money policies.
No comments:
Post a Comment