Ignoring The DOTs Will Prove Costly – September 23, 2019

Ignoring The DOTs Will Prove Costly

There is a huge gap between what the U.S. FOMC members anticipate for the fed funds rate over the balance of 2019 and 2020, and what the forward markets are discounting. The gap closed during the steady rate hiking phase in 2017-2018, as investors acknowledged that the Fed was on the right track because the economy was growing more vigorously than in prior years. The gap is now large because investors worry about protectionism and fear that a recession is approaching. Conversely, most FOMC members see the economy as being in good shape, even with a manufacturing downturn, and not in need of any additional easing.

While the Fed closely tracks inflation, it has chosen to ignore the recent upside breakout in core CPI (policy officially focuses on the lagging core price index for PCE). Bond investors also have been ignoring the gradual upward tilt to core inflation in the past two years.Our call for core inflation over the coming 6-12 months.

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