Why I remain on Team Transitory

That is the topic of my latest Bloomberg column, here is one excerpt:

The case for Team Transitory is not about whether the next pending inflation numbers will come in high or low. Instead it consists of the following two propositions:

  • The Federal Reserve can control the rate of price inflation.
  • The Federal Reserve does not want inflation to be very high.

And:

Perhaps most important, there is the market’s perspective — and the market expects the Fed to bring down inflation rates. As I write, the 10-year Treasury yield is 1.64%. That yield has been rising, but it hardly seems to predict hyperinflation, or even 5% inflation for the next 10 years. The most negative piece of evidence so far is from the TIPS market, which is predicting inflation of about 3% over the next five years.

You might be wondering whether “the market” understands inflation and the Fed. Well, investors are obsessed with the Fed and study it closely. When I encounter Team Transitory skeptics, I ask them: “What is it that you understand about the Fed that the broader market does not?” I have yet to receive a compelling answer.

As an add-on note, properly interpreted those TIPS data probably are suggesting expected inflation rates of less than three percent, perhaps even closer to two percent looking forward.

Comments

Comments for this post are closed