“I believe”!

FOMC members are terrified of falling “behind the curve”. The standard fare, therefore, is to say they cannot wait for inflation to show signs of rising, for then it would be “too late”!

They usually talk about inflation expectations, more recently showing some preference for the survey kind. However, what really stands out from two different measures of inflation expectations, the market based breakeven and the estimated Cleveland Fed, is how “anchored” they have been.

Anchored

For both the 5 and 10-year comparisons the relative behavior is very similar. The big difference at the height of the crisis may be due to TIPS liquidity issues. When QE2 ends in 2011, the Cleveland Fed measure behaves more consistently, with expectations falling, while the market based measures just “whistle on”. At about the time of the “taper tantrum” the market based drops while (surprisingly) the estimated expectations rise.

The fact is that they have “joined hands”. For the past two years the 5-year measures have been the same while the 10-year measures have “fallen in step” over the past year.

In short, what they are saying is that they still believe in the Fed´s 2% “target”, despite the “zero trap”.

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