Inflation views tilt the Feds way, a bit

Reuters – A week that included a bevy of stillugly inflation numbers may also have marked a turn in market views of the Federal Reserve, as inflation expectations fell, bond yields moderated, and even consumers stopped ratcheting up their outlook for price increases.

A survey of professional forecasters, meanwhile, seemed to endorse the Feds hope it can tame inflation without killing millions of jobs in the process.

Estimates for annual inflation a year from now in the Philadelphia Federal Reserves quarterly survey published on Friday dropped to 3 or less, depending on the specific price measure. Meanwhile the consensus view on the unemployment rate in the next two years ticked up to just 3.8 from the current 3.6, an outcome that would enthuse Fed officials if it plays out.

Policymakers, including Chair Jerome Powell, have been warning U.S. households that the large increases in interest rates they are planning to control the inflation that has soured the national mood are likely to be painful in and of themselves. The Fed raised its benchmark rate by half a percentage point last week and Powell has said increases of the same magnitude are warranted at meetings in the next two months.

“The process of getting inflation down to 2 the Fed‘s target will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like,” Powell told public radios Marketplace on Thursday.

The weeks headline annual inflation readings at the consumer and business production levels eased for the first time in months, offering some hope that consumer price increases that reached 8.5 yearoveryear in March may have crested.

While they didnt slow by nearly as much as expected, investors – rather than further stoking fears of everincreasing inflation – responded to the upsidesurprises by bidding up bond prices and pulling yields from multiyear highs.

On the week, the 10year Treasury note yield dropped by about 20 basis points, the biggest weekly decline since early March, and the 10year inflation expectation reflected in Treasury InflationProtected Securities hit its lowest since February.

Indeed, a new inflation expectations benchmark measurement from ICE showed the oneyear outlook has now dropped to near 4.5 from 6 in midApril.

Graphic – ICE inflation expectations index ICE inflation expectations index: https:graphics.reuters.comUSAFEDINFLATIONakvezxjwrprchart.

About half of the drop in Treasury yields appears to have been driven by the decline in inflation expectations, Piper Sandlers Head of Global Policy Roberto Perli wrote in a note disentangling that aspect from other factors that contribute to changes in bond yields.

That “is good news for the Fed,” Perli wrote. “If it continues which is a big if, of course, it might even induce the Fed to be somewhat less forceful in its hiking campaign. However, market inflation expectations are still too high for the Fed to claim victory for now.”

Consumers, meanwhile, appear to believe the price grind will not keep accelerating.

Data out Friday from the University of Michigan‘s twicemonthly survey of consumer attitudes showed no upward move in households’ outlooks for inflation one year out for the third months in a row, holding steady at 5.4. The view over five years was unchanged at 3 for a fourth straight month.

“They are still in the game,” former Fed governor Randall Kroszner said of the Feds quest for a socalled “soft landing.”

“Inflation expectations have not become unanchored despite inflation going from a decade where they cannot get to the goal to going to four times it. They have maintained credibility,” said Kroszner, now a professor at the University of Chicago Booth School of Business. “That is a pretty amazing feat.”