• Inflation data released last week showed that pricing pressures remained constrained in July. The year-over-year change in the personal consumption expenditures index, the Fed’s preferred measure of inflation, was just 1.4% in July, and has either moved sideways or fallen each month since February.23
  • In light of another month of weak inflation data, three voting members of the FOMC – Robert Kaplan, Neel Kashkari and Lael Brainard – this week expressed their doubts about the need to raise interest rates again in 2017.15 Brainard’s comments in a speech at the Economic Club of New York on Tuesday drew the most attention from investors and helped push down the implied probability of a rate hike at the Fed’s December meeting by more than 9%.24
  • In her speech, Brainard noted that, while the U.S. economy is currently on “solid footing,” there remains a “notable disconnect” between today’s tight labor market and inflation readings, which have remained “stubbornly below target for five years.”13
  • Brainard highlighted a range of inflation models that suggest underlying inflation trends have moved lower over the last decade, and urged policymakers to be cautious about raising interest rates until inflation moves closer to the Fed’s target of 2%.13
  • Indeed, five-year inflation expectations have declined markedly in the last three years and, as the chart highlights, are currently under their average since 2004.25 Notably, inflation expectations today are nearly 0.5% below their average between 2004 and 2007, the last time when unemployment was approximately as low as it is today.26
  • We believe current, and longer-term, inflation trends seem to indicate that interest rates are likely to remain low for some time.

1 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
2 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
3 Bank of America Merrill Lynch U.S. High Yield Master II Index.
4 Bank of America Merrill Lynch U.S. High Yield CCC and Lower Rated Index.
5 Bank of America Merrill Lynch U.S. High Yield B Rated Index.
6 Bank of America Merrill Lynch U.S. High Yield BB Rated Index.
7 Credit Suisse Leveraged Loan Index.
8 Thomson Reuters Lipper.
9 Credit Suisse Leveraged Loan Index (CCC rated component).
10 Credit Suisse Leveraged Loan Index (B rated component).
11 Credit Suisse Leveraged Loan Index (BB rated component).
12 Credit Suisse Leveraged Loan Index (retail component).
13 U.S. Federal Reserve, http://bit.ly/2wbXRFv.
14 Reuters, http://reut.rs/2vKOsp3.
15 Reuters, http://reut.rs/2wL5K8E.
16 Dow Jones Newswires, http://fxn.ws/2wclWMp.
17 Bureau of Economic Analysis, http://bit.ly/2mOhSP0.
18 Bureau of Labor Statistics, http://bit.ly/2iYbHWM.
19 MarketWatch, http://on.mktw.net/2gOKJAD.
20 CNN, http://cnn.it/2vT30Hs.
21 U.S. Federal Reserve, http://bit.ly/2wOb37h.
22 Bloomberg, based on CME data.
23 Bureau of Economic Analysis, http://bit.ly/2f7pee9.
24 Bloomberg, based on CME data.
25 University of Michigan Surveys of Consumers, Expected Changes in Prices During the Next Five Years, http://bit.ly/2hOoe1J.
26 Bureau of Labor Statistics, http://bit.ly/2ibnFLh.


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