The Asininity of Inflation Expectations, Once Again By Powell and the Fed – Mish Talk

What Do Financial Markets Say about Future Inflation?

From the Federal Reserve Bank of St. Louis, please consider What Do Financial Markets Say about Future Inflation? by YiLi Chien and Julie Bennett.

The Importance of Inflation Expectation

The effectiveness of monetary policy hinges critically on inflation expectations. If economic agents, such as households and firms, expect higher inflation in the future, the rational reaction is to purchase goods and services right away in order to avoid higher future prices. As a result, the demand for goods and services immediately rises and so does the price level, which results in higher inflation right away. Hence, the Federal Reserve needs to anchor economic agents’ long-term inflation expectations close to the inflation target in order to effectively combat inflation. This blog post looks at the recent movements in so-called market-based inflation expectations for various time horizons.

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Conclusion

In short, according to the inflation swap data, market participants believe the Federal Reserve can and will control the high inflation rate, despite price increases being more persistent than previously thought. The well-anchored longer-term inflation expectation provides additional supporting evidence of this.



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