Fed Meeting
Fed policy makers meet tomorrow and Jan. 26 to set monetary policy. The last time they gathered, on Dec. 14, they expressed frustration that the rate of inflation was too low.
"Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low," policy makers said in their Dec. 14 statement. While the Fed "anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow," they said.
The Fed's preferred measure of inflation, consumer spending excluding food and energy, held at a record low for a second month of 0.8% for the 12 months ended November, the Commerce Department said Dec. 23.
The Fed's commitment to buying more Treasuries and the rise in commodity prices has "translated into people feeling the need to buy some inflation insurance," pushing breakeven rates to levels that are unattractive, said Martin Hegarty, co-head of global inflation-linked portfolios at BlackRock Inc.
CPI Outlook
Hegarty, whose New York-based firm oversees about $1 trillion in bonds, says he favors TIPS maturing in 20- to 30- years over those due in 10 years.
Consumer prices will rise 1.7% in 2011 and 1.9% in 2012, according to the median forecasts in a survey on Jan. 13 by Bloomberg News. The unemployment rate will fall to 8.5% by the end of 2012 after ending this year at 9.3 percent, the median forecast in a separate survey showed.
"I don't think you can do a straight-line extrapolation of more optimistic growth prospects into higher near-term inflation," said Wan-Chong Kung, who helps oversee more than $100 billion as a portfolio manager at Nuveen Asset Management in Minneapolis.
The economy will need to produce substantial growth and make use of unutilized capacity "before we can begin to meaningfully cut into that slack and meaningfully and sustainably create inflation," she said.