Did the Fed Just Hit Its 2% Target?

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The Fed's next rate move and its "higher for longer" policy mantra are predicated on high and sticky inflation. Inflation has fallen nicely from its peak but not enough to sway the Fed to officially pause rate hikes and certainly not enough to begin reducing rates. As the Fed reminds us, rate cuts depend on meeting its 2% inflation goal. While unstated, a significant slowdown in economic activity or renewed regional banking problems would also get the Fed to act.

What if I told you that CPI is effectively at 2% now? Would the Fed's policy stance remain the same?

The following article shares some insight into the CPI inflation report and distortions caused by its most significant contributor, shelter prices.

Might the market be offsides?

The bond market is starting to worry that the recent decline in prices may be short lived. As I show below, five-year inflation expectations have risen since late March. The increase is not overly concerning but is sparking fear amongst some longer-term bond investors that declines in inflation are in the rear-view mirror. They fear we are entering a long period of higher prices. Over the period shaded below, 10-year UST yields rose from 3.40% to 4.20%.

5 year inflation

I understand that the burgeoning budget deficit and associated borrowing needs drive higher yields, but expected inflation rates are equally powerful.

As you read this article, ask yourself, what would Fed monetary policy be if inflation was already at the Fed's target?