A week of reversal of inflation numbers may have marked a turn in market views of the Federal Reserve, as bond yields fell, bond yields moderated, and even consumers stopped ratcheting up their outlook for price increases, according to a week that included a bevy of still-ugly inflation numbers.
A survey of forecasters showed that the Fed hopes that it can tame inflation without killing millions of jobs in the process.
Estimates for annual inflation a year from now in the Philadelphia Federal Reserve's quarterly survey on Friday dropped to 3% or less, depending on the specific price measure. The consensus opinion on the unemployment rate went up to just 3.8% from the current 3.6% in the next two years, an outcome that would enthuse Fed officials if it plays out.
Policymakers, including Chair Jerome Powell, have warned the large increases in interest rates they are planning to control the inflation that has soured the national mood, and that they are likely to be painful in and of themselves. The Fed raised its benchmark rate by half a percentage point last week, and Powell said that increases of the same magnitude are warranted at meetings in the next two months.
The Fed wants inflation to be down to 2%, but the most painful thing would be to fail to deal with it and inflation to get into the economy at high levels, and we know what that's like, Powell told public radio's Marketplace on Thursday.
Consumer price increases that reached 8.5% year-over-year in March may have crested after the week's headline annual inflation readings at the consumer and business production levels were slowed for the first time in months.
While they didn't slow down much as expected, investors responded to the upside-surprises by bidding up bond prices and pulling yields from multi-year highs rather than stoking fears of ever-increasing inflation.
The 10 year Treasury note yield dropped by about 20 basis points on the week, the biggest decline since early March, and the 10 year inflation expectation in Treasury Inflation-Protected Securities hit its lowest since February.
The one-year outlook has dropped to near 4.5% from 6% in mid-April, according to a new inflation expectations benchmark from ICE.
In a note disentangling that aspect from other factors that contribute to changes in bond yields, Piper Sandler's head of global policy Roberto Perli wrote that half of the drop in Treasury yields appears to have been caused by the decline in inflation expectations.
That is good news for the Fed, Perli wrote. It is a big if it might cause the Fed to be somewhat less forceful in its hiking campaign. Market inflation expectations are still too high for the Fed to claim victory for now. Consumers seem to believe that the price grind won't keep accelerating.
Data released Friday from the University of Michigan's twice-monthly consumer attitudes showed no upward move in households' outlooks for inflation one year out for the third month in a row, holding steady at 5.4%. The view was unchanged for the past five years, at 3% for a fourth straight month.
The Fed is trying to make a soft landing, according to former Fed governor Randall Kroszner. Inflation expectations have not been unanchored despite inflation going from a decade ago when they can't get to the goal of four times it. Kroszner, now a professor at the University of Chicago Booth School of Business, said they have maintained credibility. That is a pretty amazing feat.