• While many investors have been focused on the potential implications of the upcoming change in leadership at the U.S. Federal Reserve, Fed policymakers have already made some notable changes recently in the way they have been talking about inflation.
  • For example, observers may have grown accustomed to Fed officials’ view that soft inflation figures are due to “idiosyncratic or one-time factors,” which policymakers highlighted as recently as September’s FOMC meeting.28 On numerous occasions, too, Fed Chair Yellen has cited falling prices for cellphone plans as an example of one factor that has kept a lid on prices.
  • Yellen’s tone shifted notably, however, at an appearance at New York University’s Stern School of Business on the Tuesday before Thanksgiving. Yellen said she is no longer “certain that [low inflation data] is transitory,” adding that it could be a result of “something more endemic or long-lasting.”29
  • The minutes of the Fed’s October-November meeting released one day later reflect a similar change in the narrative. Many participants at the meeting observed that low inflation readings may be reflective of one-time factors, but also “could prove more persistent.”30
  • This shift in tone comes amid further evidence of muted inflation. Data released this week showed that both the PCE index and core PCE index remained anchored well below the Fed’s preferred 2.0% mark.19 Core PCE has been stuck below 2.0% since April 2012 while the broader PCE index, which reflects volatile movements in energy prices, briefly rose above 2% in early 2017 before falling once again.19

1 Federal Reserve Bank of St. Louis, S&P 500, http://bit.ly/2d3pN5b.
2 Federal Reserve Bank of St. Louis, WTI, http://bit.ly/292Tgue.
3 Federal Reserve Bank of St. Louis, GDP, http://bit.ly/2jAzH3p.
4 ICE Bank of America Merrill Lynch U.S. High Yield Master II Index.
5 ICE Bank of America Merrill Lynch U.S. High Yield Consumer Products Index.
6 ICE Bank of America Merrill Lynch U.S. High Yield Telecommunications Index.
7 ICE Bank of America Merrill Lynch U.S. High Yield CCC & Lower Rated Index.
8 Credit Suisse Leveraged Loan Index.
9 Credit Suisse Leveraged Loan Index (retail component).
10 Reuters, http://reut.rs/2itkdlc.
11 The Wall Street Journal, http://on.wsj.com/2jvnnkN.
12 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
13 ICE Bank of America Merrill Lynch U.S. High Yield Energy Index.
14 Credit Suisse Leveraged Loan Index (energy component).
15 S&P Dow Jones Indices, http://bit.ly/2ydsLD0.
16 Alerian, http://bit.ly/2yKWiRz.
17 U.S. Federal Reserve, http://bit.ly/2kb4DuO.
18 Bureau of Economic Analysis, GDP, http://bit.ly/1DqcVBJ.
19 Bureau of Economic Analysis, PCE, http://bit.ly/2mOhSP0.
20 The Wall Street Journal, http://on.wsj.com/2j7FnlP.
21 Federal Reserve Bank of St. Louis, 10-year Treasury, http://bit.ly/29ecBfp.
22 The Conference Board, http://bit.ly/1eu7yyH.
23 Bloomberg, https://bloom.bg/2Antqjn.
24 Federal Reserve Bank of St. Louis, 2-year Treasury, http://bit.ly/2anGvQ0.
25 Federal Reserve Bank of St. Louis, 10-year/2-year Treasury spread, http://bit.ly/2oMWaP2.
26 Econoday, http://bit.ly/1iJOdAP.
27 U.S. Federal Reserve, http://bit.ly/29y0IjN.
28 Federal Reserve September 2017 minutes, http://bit.ly/2wOKgoX.
29 The Wall Street Journal, http://on.wsj.com/2B1qwjw.
30 Federal Reserve October-November 2017 minutes, http://bit.ly/2hVcZ95.

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