Focus on Expectations

A day after our post on using the market as a forecaster, the Wall Street Journal has an interesting article on a change in the way the Fed looks at employment and inflation. The Fed is becoming less concerned that in the short run high levels of employment or unemployment have a meaningful impact on inflation. Now, this doesn't mean changes in the level of employment will be totally ignored by the Fed, but it does seem less likely that the Fed will alter rates on employment changes. This is good news for interest rates in the current high employment environment.

The Fed has heightened its focus on inflationary expectations and changes therein. Review our prior post on the spread between 10yr TIPS and 10yr Treasuries. It is market based measure of inflation expectations. And today it shows expectations at a low ebb. Our bet, the Fed stands pat.