The Federal Reserve has much further to go to reassure jittery markets that long-term inflation expectations are under control.
Even after the Fed kicked off a concerted campaign to extinguish price pressures, bond markets suggest they’ll linger for years longer than the upcoming tightening cycle that is set to peter out by 2024.
“For sure the Fed is concerned about inflation expectations becoming unanchored,” said Bob Michele, J.P. Morgan Asset Management’s fixed-income chief. “They are probably six or 12 months too late so they need to be more aggressive.”
Their hawkish news conference after Wednesday’s rate decision suggests policy makers are more worried about inflation than growth, Michele said. A supersized 50 basis-point hike might even be in the offing.
Sanctions on energy supplier Russia following its invasion of Ukraine are only expected to exacerbate price pressures, with the effects of the most recent oil spike to above $100 a barrel yet to be reflected in the price index.
The U.S. consumer inflation index rose by 7.9% for the 12 months through February, the highest since 1982. That gauge, which is used to derive inflation breakeven rates, has historically run about 40 basis points above the Fed’s preferred inflation measure.
David Petrosinelli, managing director at Insperex LLC, said that only moderate declines in the breakeven rate make sense, especially given that Fed Chair Jerome Powell stressed that monetary policy works with a lag.
It’s probable that in the near-term inflation exceeds the Fed’s projection of 4.3% for this year, he said. The central bank raised rates for the first time since 2018, hiking a quarter percentage point on Wednesday, and setting the stage for six more such hikes in 2022.
“Powell has already said these rate increases aren’t going to be of any immediate relief on inflation, and I couldn’t agree with him more,” Petrosinelli said.
Even through the breakeven curve remains inverted, meaning inflation risks are more pronounced down the road, longer-term breakeven rates have jumped. Ten-year inflation expectations reached 3% on Monday, the highest since records began in 1997, dropping only slightly after the Fed’s rate hike and hawkish comments.