Forex Blog: Currency Trading News & Analysis.

April 5th 2005

Investors and Fed disagree over inflation

The Federal Reserve Bank continues to highlight inflation as a potential cause of concern for the US economy. In recent speeches and meetings, both national and regional officials have cited many statistics in defense of their claims. The producer price index and the consumer price index are rising, they say. However, investors feel that current inflation forecasts of 2.4% will hardly restrain an economy that is growing at %3.8. For this reason, they have depressed long term bond yields, which are closely tied to long-term inflation forecasts. In fact, the bond yield curve is currently inverted, so that long term yields are actually lower than medium-term yields. This phenomenon is likely the result of investors’ beliefs that the Fed’s inflation fears are overstated. The situation has left Alan Greenspan perplexed, as he has made inflation a central theme in most of his recent speeches. Reuters reports:

Evidence that inflation is being kept under control may lie in the lackluster pace of wage growth. Wages increasing at a slower rate than consumer prices is a "calming influence on the bond market," said a senior economist at A.G. Edwards. "Even though the Fed has raised some concern about rising inflation, inflation so far has not gotten out of hand," he said.

Read More: Bond, currency markets ask: where’s the inflation?

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