Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Treasury Market Yawns At Fed’s New Inflation Policy

By James PicernoBondsSep 15, 2020 08:10AM ET
Treasury Market Yawns At Fed’s New Inflation Policy
By James Picerno   |  Sep 15, 2020 08:10AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

When a central bank announces a formal policy change to lift inflation it’s reasonable to expect that the government bond market would notice. But so far there are few signs that US Treasuries are reacting to last month’s roll out of the Fed’s average inflation targeting (AIT) policy, which is designed to “moderately overshoot” the 2% target for “some time,” the bank’s chair, Jerome Powell, explained last month.

Since Powell outlined the policy change on Aug. 27 the benchmark 10-year Treasury yield has traded in a tight range, slipping slightly to 0.68% on Monday (Sep. 14), based on daily data. In other words, the sharp drop triggered by the coronavirus in the spring continues to hold and the Fed’s efforts to persuade the crowd that a new regime’s in town have so far fallen on deaf ears.

UST 10 Yr Daily Chart
UST 10 Yr Daily Chart

Inflation trends, of course, require time to unfold and so the Fed’s dovish policy may eventually be successful. “You’ve got to forecast five and 10 years ahead if you want to talk about average inflation targeting,” says Andrew Levin, a former Fed economist Levin who’s current a professor at Dartmouth. He added:

“Professional forecasters think we’re going to be short of the target for the next few years, which really raises the question, what’s the Fed’s longer-run plan?”

The main focus is whether AIT can shift the long-running disinflation trend that’s been in force in the US and around the world. For many investors and analysts, they’ll believe it when they see the evidence. For now, the coronavirus-triggered headwinds weighing on the economic recovery suggest that regime change for inflation is a low-probability event. Or so it appears via the Treasury market’s implied inflation forecast, based on the yield spread for nominal less inflation-indexed notes.

The implied estimates for the 5-year and 10-year maturities, for example, after rebounding in recent months, have stalled above the 1.5% mark – roughly in line with the pre-pandemic forecasts. The market, in other words, seems to be saying that while the sharply lower forecasts triggered by the initial coronavirus shock in March are too extreme, the low-flation trend that prevailed previously still applies.

5 Yr And 10 Yr Treasury Inflation Forecasts
5 Yr And 10 Yr Treasury Inflation Forecasts

What does the Fed think? Tomorrow’s policy announcement and press conference (Sep. 16) offer an opportunity to clarify and elaborate, although a number of analysts expect few new details will emerge.

According to Tim Duy, an economics professor at the University of Oregon who pens the widely read Fed Watch blog:

“The Fed meets this week, but don’t get your hopes up for big changes in policy or additional details about the Fed’s new ‘average inflation targeting’ strategy. For the moment, the Fed remains content to simply entrench expectations that the policy path is locked down at zero for the foreseeable future.”

What could change this trend? Dramatic increases in government spending in response to the economic fallout from the coronavirus is a possibility. By some accounts, it’s just a matter of time before the huge upward shift in fiscal stimulus brings higher inflation and higher interest rates. Perhaps, but as long as the economic recovery remains precarious, it’s not obvious that inflation is about to turn sharply higher.

The US economy continues to recover but there are risks that the rebound may falter. Will tomorrow’s retail sales report for August suggest otherwise? Economists expect that spending will rise 1.0% vs. July, marking the fourth straight month of growth. Encouraging but the bounce is slowing and the ongoing risk of labor market stress is lurking.

New filings for unemployment benefits have declined and are now far below the peak surge, which lifted claims to nearly 6.9 million for the week through Mar. 28. The latest increase – 884,000 for the week ended Sep. 5 – reflects progress by comparison. But the gain, which matched the previous week’s increase, still reveals a labor market that’s suffering. Prior to the pandemic, a near-900,000 rise in newly unemployed workers was unprecedented since 1967 (the start of the claims data set). No more.

The huge gains in jobless claims, week after week, suggest that disinflation’s momentum will endure. The political gridlock in Congress offers no hope that a new fiscal response will arrive before the election. That leaves the Fed to explain how AIT will suffice to end or reverse a decades-long slide in inflation.

The stakes, in short, are high for Powell’s press conference on Wednesday. Can the Fed chair change expectations? He’ll try.

“We expect Chair Powell to spend a significant amount of time during the press conference discussing the Fed’s conclusion of the strategy review announced in August,” Nomura economists predicted in a research note last week.

Mr. Powell, you have the floor.

Treasury Market Yawns At Fed’s New Inflation Policy

Related Articles

Forex Analytix
Yields Pull Back, But Move Is Likely Corrective By Forex Analytix - Jun 30, 2022

By Steve Voulgaridis United States 10-year yield is pulling back after testing twice the 3.5% area but the move to the D/S is unfolding in a corrective manner for now (descending...

Petros Steriotis
Bonds: Taking A Breath By Petros Steriotis - Jun 29, 2022

Not coincidentally, the 10-year US bond yield is testing the post-pandemic waters, comfortably above the 3% threshold and without visible strength to retreat. Original Post

Treasury Market Yawns At Fed’s New Inflation Policy

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email