The implied inflation outlook via 5-year Treasuries ticked up to the 2.10% mark this week for the first time since 2013. The increase matches the forecast for 10-year Notes, which have been estimating future inflation at or above the 2.10% mark since mid-February. The forecasts are based on the yield spreads for the nominal rates less their inflation-indexed counterparts.
Both maturities projected inflation at the 2.10%-plus level for a second day in a row on Wednesday (March 7), which hasn’t happened in five years. As a result, market sentiment is contributing to the case for expecting that the Federal Reserve will continue to raise interest rates at the monetary policy meeting scheduled for March 21.
Fed funds futures this morning are currently estimating an 86% probability of a rate hike at the FOMC meeting later this month, based on CME data in early trading today (March 8).
An upbeat economic assessment is also a factor for anticipating another round of policy tightening, according to yesterday’s comments by Federal Reserve Governor Lael Brainard. Speaking at a conference in New York, she explained:
The macro environment today is the mirror image of the environment we confronted a couple of years ago. In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true.
Dallas Fed President Robert Kaplan offered similar remarks on Tuesday, advising that he favors a trio of rate hikes this year. “It’s three for this year. I think we should get started sooner rather than later, though,” he told CNBC.
Meanwhile, yesterday’s release of the Fed’s Beige Book noted firmer inflation pressures. “Prices increased in all districts, and most reports noted moderate inflation,” the report noted.
The ongoing pickup in wage growth is widely cited by inflation hawks as a key piece of evidence that upside pressure is building. The annual increase in annual hourly earnings for private-sector workers accelerated to a 2.9% pace in January — the highest since the recession ended in mid-2009.
