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- Latest data suggest that consistent FED over the rate hike this year might be succeeding to anchor the inflation expectation over the longer horizon.
- 5 year break even inflation rate as shown in the chart is rising much faster rate after falling to the lowest point in January.
- The rate has jumped nearly 50 basis points after making a low in of 1.16 percent in January.
- Similarly other measure like 5 year, 5 year forward inflation expectation is hovering near 2.20 percent after similar slump below 2 percent in January.
- Similar trend can be seen in 10 year break even inflation rate, hovering near 2 percent.
- As argued before, FED could be pushing the inflation expectation through forward guidance affecting the term premium.
- Such success could be short lived if actual inflation as measured by CPI, PCE, PPI etc. fail to arrive.
Impact -
- Latest push of the dollar against the currencies could be partly fueled by the above expectation anchoring and rise.
- Under such circumstance dollar is expected to strengthen further and yields firmer over the medium term.
