The Fed’s target for inflation (not inflation expectations) is 2%. But rising inflation expectations have been seen as a factor that could lift current inflation. Fed officials concerned about the downside risk of runaway inflation are closely watching surveys and market readings to make sure expectations do not become “unanchored” from the Fed’s target. “Inflation at these levels is, of course, a cause for concern,” Fed Chairman Jerome Powell said on Aug. 27. “But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.” “We are seeing them still anchored,” Philadelphia Fed President Patrick Harker told Yahoo Finance on Aug. 27. “But it is clearly a risk that inflation may be running higher than we would like.”
Rising survey-based measures of inflation expectations are testing the resolve of policymakers who maintain that the faster pace of price increases is likely to be a temporary phenomenon. The New York Fed’s Survey of Consumer Expectations asks approximately 1,300 household heads about their overall expectations for inflation and prices in categories like food, gas, housing, and education. Source: Federal Reserve Bank of New York
Officials at the Federal Reserve, the central bank tasked with ensuring price stability, have pointed to virus-induced supply chain disruptions as inflationary pressures that can’t last forever. Over a three-year horizon, inflation expectations rose to 4.0%, also a series high for the survey.
Story continues The central bank’s next policy-setting announcement will take place on Sept. 22. For the Fed’s part, officials are debating the timing of when to start paring back on its extraordinarily accommodative monetary policy as inflationary pressures remain high. Powell and other Fed officials have telegraphed that the first step, which would involve slowing its aggressive asset purchase program, is likely to begin later this year.
A key market-based measure of inflation, the 5-year breakeven rate, measured the spread between the 5-year U.S. Treasury and the 5-Year Treasury Inflation-Indexed Constant Maturity Securities (or TIPS). Credit: Federal Reserve Bank of St. Louis Market-based measures of inflation expectations, by comparison, have suggested more muted expectations for the pace of price increases. Bets placed on the market for Treasury Inflation-Protected Securities have steadily suggested inflation expectations over a five-year horizon of about 2.5%.
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