Advisor Login Contact Us

At This Juncture No Intended Change in Speed Limit

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%.

Return To Index Page
Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.