A surprising recent move in inflation-breakevens: hard to understand without both (a) a return of inflation becoming a very minor possibility, and (b) a feared Fed loss of control in terms of its...
Sorry, this is my fault. I sold my TLT two weeks ago. It is amazing to see the lengths that markets will move just to provoke my regret on every trade I make.
I'd have expected a much bigger drop in the real rate, given increasing evidence that generative AI is unlikely to generate the profit bonanza that's been assumed until now. But it still seems as if the Fed, rather than anything in the real economy is what drives bond rates
as well as your correct point about risk neutral probability, remember that the market price is (broadly speaking, please don't send letters if you remember Charles Manski better than I do) the money weighted median of the active investment money rather than the mean. particularly in situations where the true distribution of expectations is bimodal, the marginal trade might be pricing an opinion that hardly anyone actually holds. I think that might be what's going on here - not so much "the bond market predicts secular stagnation" as "half of the bond market predicts inflation and half depression", and the price has settled down at a level where both halves think they're getting a great deal.
Just a nit: I believe the narrative description of the red and blue lines in the breakeven charts has it reversed from the series colors in the charts themselves. Also a question: Could you make the case that real rates have an effective floor when nominal rates have escaped the ZLB? That real rates have some "permanent" component that is not so dependent on either point forecast or tails evaluation of future inflation? Somehow a dampened response to nominal rate changes does not seem so crazy to me..
This is great, Brad, exactly the sort of informed comment I would like to get from you occasionally - when the situation deserves your time and attention. Are you familiar with PWC's World in 2050 that was revised and updated a few times, but is no longer published. Other than wrt China right after the GFC it was remarkably prescient in its forecasts of long term growth in many countries . I wish someone would pick up where they left off.
In its obsession to gain confidence on inflation, the Fed has created the conditions where only a Bull Steepener might work to get us out of this funk. Thankfully, the Steepener appeared only for about five minutes on a recent morning. But the Steepener is just what the Fed ought to have avoided given the asymmetry related to the ZLB. The Steepener is probably now a mixed blessing. It may help with cyclical growth, but it will also take the Fed Funds rate closer to the ZLB. That could've been avoided had the Fed been acting earlier. Let's hope the US economy proves all of this wrong and a Steepener becomes unnecessary. Fingers crossed.
Yep! And given the Fed's policy choices over the past six months or so, the Fed will reach the destination you have outlined, kicking and screaming (I hope not!).
Sorry, this is my fault. I sold my TLT two weeks ago. It is amazing to see the lengths that markets will move just to provoke my regret on every trade I make.
I'd have expected a much bigger drop in the real rate, given increasing evidence that generative AI is unlikely to generate the profit bonanza that's been assumed until now. But it still seems as if the Fed, rather than anything in the real economy is what drives bond rates
Yes. So would I have. I am, as a result, disturbed...
What if part of our inflation rate is due to climate change...prices of commodities go up, insurance rates in climate affected areas go up, etc.
Should we adjust the targeted inflation rate to reflect the causes of inflation and adjust accordingly.
For any1 interested, here are my exceptionally accurate CPI estimates:
https://open.substack.com/pub/arkominaresearch/p/jul-2024-cpi-estimate?r=1r1n6n&utm_campaign=post&utm_medium=web
as well as your correct point about risk neutral probability, remember that the market price is (broadly speaking, please don't send letters if you remember Charles Manski better than I do) the money weighted median of the active investment money rather than the mean. particularly in situations where the true distribution of expectations is bimodal, the marginal trade might be pricing an opinion that hardly anyone actually holds. I think that might be what's going on here - not so much "the bond market predicts secular stagnation" as "half of the bond market predicts inflation and half depression", and the price has settled down at a level where both halves think they're getting a great deal.
Just a nit: I believe the narrative description of the red and blue lines in the breakeven charts has it reversed from the series colors in the charts themselves. Also a question: Could you make the case that real rates have an effective floor when nominal rates have escaped the ZLB? That real rates have some "permanent" component that is not so dependent on either point forecast or tails evaluation of future inflation? Somehow a dampened response to nominal rate changes does not seem so crazy to me..
This is great, Brad, exactly the sort of informed comment I would like to get from you occasionally - when the situation deserves your time and attention. Are you familiar with PWC's World in 2050 that was revised and updated a few times, but is no longer published. Other than wrt China right after the GFC it was remarkably prescient in its forecasts of long term growth in many countries . I wish someone would pick up where they left off.
In its obsession to gain confidence on inflation, the Fed has created the conditions where only a Bull Steepener might work to get us out of this funk. Thankfully, the Steepener appeared only for about five minutes on a recent morning. But the Steepener is just what the Fed ought to have avoided given the asymmetry related to the ZLB. The Steepener is probably now a mixed blessing. It may help with cyclical growth, but it will also take the Fed Funds rate closer to the ZLB. That could've been avoided had the Fed been acting earlier. Let's hope the US economy proves all of this wrong and a Steepener becomes unnecessary. Fingers crossed.
Yep! And given the Fed's policy choices over the past six months or so, the Fed will reach the destination you have outlined, kicking and screaming (I hope not!).