Once again, rather than the Federal Reserve guiding expectations, it is the market calling the shots - this time in correctly expecting fewer and later rate rises.

Yet another rapid drop in the price of oil has helped push consumers' longer-term expectations of inflation further away from both the Fed's target and its claims of where it will be in future years.

Even relative hawks and insiders like James Bullard, President of the St Louis Federal Reserve, are now expressing reservations about policy, less than a month after helping to push through the first rate rise in nearly a decade.

"With renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome," Bullard, a voting member of the Federal Open Market Committee, said in a speech on Thursday.

And though he acknowledged that the Fed usually discounts substantially the temporary impact of energy price changes, he noted that "one circumstance where one may be more concerned is when inflation expectations themselves begin to change due to the changes in crude oil prices."

Concern about this is coming from both inside and outside the Fed tent, and from hawks and doves.

Narayana Kocherlakota, until Jan. 1 the president of the Minneapolis Fed, sent a tweet on Wednesday expressing concern: "Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows."

The five-year breakeven inflation rate, which express where the bond market expects inflation to be over the coming five years, have been sinking rapidly in the New Year, tracing the decline of oil and the stock market, and now touching just 1.19 percent this week. That's moving the wrong direction from the Fed's 2 percent target, an aspiration which the forward market has not endorsed since July of 2014.

To be sure, Kocherlakota, a dove's dove, was needling his former colleagues, with whom he has long-standing and seemingly intractable disagreements about the direction and mechanics of inflation. Still, at the point at which Bullard gets involved in this way, it is time to take seriously the idea that the fall in energy prices might force a rethink of the course of policy.

It is also important to remember that the bond market does roughly as good a job forecasting inflation as the stock market does of divining future corporate earnings or the timing of recessions. Which is to say both are often wrong.

First « 1 2 » Next