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Inflation expectations and forecasts - BBH

FXStreet (Guatemala) - Analysts at Brown Brothers Harriman explained that the Federal Reserve threw investors a curve ball last week.

Key Quotes:

"Until then, Fed officials have shown a clear preference for survey-based measures of inflation expectations."

"Last week, seemingly out of the blue that Fed made reference to market-based measures of inflation expectations."

"It implied that the decline in the break-evens (difference between conventional and inflation-linked bond yields) got officials' attention."
"This is what we mean by temporal inconsistencies, and why anticipating what the Fed will do is so difficult. There are two basic ways to measure inflation expectations, surveys and market-based. The Fed showed a preference for one and then cited the other."

"The events in China and the potential knock-on effects on other important US trading partners and commodities spooked officials. The vast majority wanted to err on the side of prudence, even though Yellen argued against exaggerating the importance of the precise timing of the lift-off in favor of appreciating the gradual nature and limited scope of this monetary cycle. As several officials have since acknowledged, it was a close call.

Political considerations suggested that a domestic reason be given for the hesitancy. The lack of substantial progress on the price stability mandate was readily available. The Fed overstated its case by citing market-based measures of inflation expectations. And the San Fran Fed economists called it out. This means that the Fed may raise rates regardless of what happens to the market-based measures of inflation expectations in the coming months."

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