I believe these two commitments are contradictory if we manage to achieve a decent economic recovery, and it is looking more and more like we are finally getting exactly that.
Here is a chart of the implied 2 year ahead level of inflation expectations derived using yields on inflation protected securities (TIPS):
The red line is the Fed's 2% ceiling.
People, can I get a YIKES?
The source for this chart is here, the hat tip goes to LeBron, and the source also argues that markets are strongly pricing in a Fed rate increase in 2013.
At this point, unless the recovery falters, I don't think the Fed will keep EITHER of its two promises
3 comments:
The forward fed funds rate could just reflect stochastic noise, given the zero bound. I don't think it necessarily reflects an increase in the mean expected rate. If the rate does rise, it is not likely to rise just 25 or 50 basis points. I agree with you that the story given by the fed is unlikely to hold.
I think some people view the 2% as a target, not a ceiling, in which case the Fed is too low right now and 2013 will actually mark success.
Rate hike in 2013? Shades of Nordhaus!
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