Inflation: Is the Fed Getting Its Way?

Written by: Global Thought Leadership | June 01, 2018

Source: Bloomberg, June 1, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


The U.S. jobs report for May came in solidly above expectations, with the headline unemployment rate at 3.8%, a low last seen in April 2000 at the end of the tech boom.

Hourly earnings, the most closely-watched number from the report, rose 0.3% from April, and 2.7% year-over-year for the 12 months ended May 2018.

Growth in earned wages matters as a measure of potential downward pressure on corporate profits, a harbinger of future consumer demand, and the effect of both on inflation in general.

Because its mandate is to regulate inflation as well as support employment, the Fed scrutinizes each release of inflation-related data, be it producer prices, consumer prices, import prices, or wages in making its decisions to raise or lower rates.

The strong May report seems to support observers who believe that Fed will raise rates at least two more times by the end of 2018.

But direct measures of inflation tell a slightly different story.

The two the Fed watches most closely -- the Core Personal Consumption Expenditure Deflator and the Fed’s own measure of financial market signals about the level of inflation five years from now -- continue to converge on the Fed’s target rate of 2 percent.

The more volatile U.S. Treasury 5year-5year inflation breakeven rate is telling the same story, suggesting that in that segment of the market for U.S. Treasuries, the Fed has gained a significant measure of credibility in the years following the 2008 Great Financial Crisis.

The bottom line: markets and the Fed are pointing in roughly the same moderate direction for now, which potentially augurs well for financial markets overall over the coming months.


All data Source: Bloomberg, June 1, 2018.



U.S. Treasury Inflation Protected Securities (“TIPS”) are bonds that receive a fixed, stated rate of return, but they also increase their principal by the changes in the CPI-U (the non-seasonally adjusted U.S. city average of the all-item consumer price index for all urban consumers, published by the Bureau of Labor Statistics). TIPS, like most fixed income instruments with long maturities, are subject to price risk.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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