Subscriber Insider
April 6, 2021
"Warnings about inflation are nothing new. And for years predictions of its imminent return have flopped. However the new macro-environment has brought the inflation debate back in a big way. The U.S. is engaged in fiscal expansion on a historic scale. The Fed has signaled its willingness to tolerate higher prices at least for some period of time. And finally, the speed of the recovery, combined with Covid-related disruptions that have impaired the supply chain, create at least the potential for a new inflation regime." —Joe Weisenthal, News Director, Bloomberg News
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What Bloomberg Markets Is Watching
It's a massive understatement to say investors have changed their minds about the outlook for U.S. inflation over the past year. But alarm in some quarters about runaway prices may be unwarranted judging by the way markets are pricing risks.

Growing faith in the U.S. recovery has had a profound impact on the bond market. The Senate takeover by Democrats in January cleared a path for the Biden administration to ramp up spending on pandemic aid. With roughly $5 trillion already approved, the White House has now proposed a multi-trillion dollar infrastructure package. Beyond U.S. shores, all that spending may also help drive the global recovery. All of this has Wall Street ratcheting up growth forecasts.
As a result, inflation expectations are rebounding, as suggested by the rise in "breakevens." These gauges of market outlook for consumer price inflation are derived from the difference between yields on nominal and inflation-protected government bonds. In the U.S., the 10-year breakeven has climbed sharply since the market shock of March 2020. The rate is now running close to 2.4%, its highest since 2013.

If that's the market's vision over the next decade, it’s not exactly out of control. Nor is it out of whack with the Fed’s goal. Translated to the central bank’s preferred inflation gauge — personal consumption expenditure, which typically runs cooler than consumer price inflation — it’s only a touch above the 2% target.

That's a win for the Fed, which wants to hold interest rates near zero at least until unemployment approaches pre-pandemic lows. Policymakers are also willing to allow inflation to run slightly hotter to build a more inclusive workforce. One big lesson they’ve learned through many years of undershooting inflation targets is that a slow-walked recovery won’t help them achieve their goal. — Emily Barrett, U.S. rates reporter
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