Federal Reserve Chair Jerome Powell has taken a lot of heat in the past 24 hours about his failure to effectively communicate the central bank’s intentions with its first interest-rate cut since the financial crisis.

One thing he was clear about, though: Policy makers find stubbornly low U.S. inflation concerning, and persistently missing the Fed’s 2% target for price growth was a chief reason they decided to move ahead with a bit of monetary stimulus. Here’s the relevant part of Powell’s opening statement:

    “The domestic inflation shortfall has continued. Core inflation, which excludes food and energy prices and is a better gauge of future developments than is total inflation, has run at 1.6 percent over the past 12 months. We continue to expect that inflation will return over time to 2 percent. But domestic inflation pressures remain muted, and global disinflationary pressures persist. Wages are rising, but not at a pace that would put much upward pressure on inflation. We are mindful that inflation’s return to 2 percent may be further delayed, and that continued below-target inflation could lead to a worrisome and difficult-to-reverse downward slide in longer-term expectations.”

For one thing, this is a much different tone from the one Powell conveyed in early May, when he said officials “expect that some transitory factors may be at work” in keeping inflation low. It also probably reflects that the Fed would like to steepen the U.S. yield curve, given that some portions are still inverted, in a closely watched indication of a future recession.

Unfortunately for Powell and his colleagues, markets had other ideas.

The yield curve from three months to 10 years remains firmly inverted, while the spread between 2-  and 10-year Treasuries briefly reached the narrowest since 2007 after the Fed decision. Perhaps counterintuitively, this flattening isn’t because bond traders are rapidly pricing out further interest-rate cuts. Two-year Treasury yields, for instance, are actually lower than they were to start the week. Indeed, fed funds futures markets have barely taken out any 2019 tightening since a couple of days ago, hardly a sign that traders are fully buying into the idea of a “mid-cycle policy adjustment.”

Rather, the market’s revolt against the Fed is showing up through so-called breakeven rates in the U.S. bond market. Breakevens are a market-based measure of inflation expectations and reflect the difference in yield between nominal Treasuries and similar maturity Treasury Inflation Protected Securities. That spread should widen, in theory, given that the Fed declared it lowered interest rates to jump-start inflation.

No Inflation!

Instead, the exact opposite has happened. Ten-year U.S. breakevens have tumbled over the past two days by the most since late May, to 1.7 percentage points. Five-year breakevens, at 1.49 percentage points, are nearing the lowest level since 2016.

That downward trend only gained momentum on Thursday after the Institute for Supply Management’s index on business prices paid fell to a three-and-a-half year low. If it holds, this one-day move lower in 10-year breakevens will be the biggest since March. Regardless, the pricing out of inflation has dragged longer-term Treasury yields down, the main driver behind the sharply flatter curve.

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