Fed Governor Phillip Johnson rejected arguments for raising the Fed’s 2% inflation goal stating, “changing it could destabilize well anchored inflation expectations.” Johnson further commented “I am under no illusion that it is going to be easy to get the inflation rate back under 2.0%.”
Bloomberg indicated the Fed set a formal inflation target of 2% in 2012.
According to Johnson a major reason as to not to change the rate is “the reputational costs that will undermine the key benefits of well-anchored longer run inflation expectations…it would introduce an additional risk by calling into the Fed’s commitment to its goals and lead people to suspect that the target could be changed opportunistically in the future.”
As noted many times, longer dated Treasuries have complete confidence in the Fed’s inflationary fighting prowess given that typically longer dated debt trades about 250-300 bps over the prevailing inflation rate. Today the debt is trading about 250 bps below the inflation rate.
With a $31.5 trillion [and growing] deficit, if inflationary expectations become unanchored, such un-anchoring can have a considerable impact on debt service requirements and the economy.
Commenting on yesterday’s activity, equities pared gains as a slew of data pointed to a resilient economy, adding evidence that the Federal Reserve will remain restrictive for longer than previously expected. Treasuries were relatively quiet. Last night the foreign markets were mixed. London was down 0.49%, Paris up 0.08% and Frankfurt up 0.11%. China was up 0.65%, Japan up 0.08% and Hang Seng down 0.79%. Futures are flat. The 10-year is up 1/32 to yield 3.94%.