• U.S. stocks rallied on Wednesday while the 10-year U.S. Treasury note briefly dipped as low as 3.01%.1 The move took place after Fed Chair Jerome Powell said in his much-anticipated speech that interest rates are now “just below” estimates of the neutral range.2
  • In his comments, Powell also highlighted the health of the U.S. economy, noting the unemployment rate is currently at a 49-year low while inflation is finally near 2% after sitting well below the Fed’s target for many years.2
  • Many investors have long been focused on inflation, fearing that the Fed may be behind the curve in battling potential price pressures given the labor market’s strength along with recent upward movement in wage growth.
  • To this end, however, recent market-based inflation expectations tell a different story. As the chart shows, 2-year and 5-year breakeven inflation rates, which measure inflation expectations over the respective time periods, have fallen considerably since early October.3
  • Some of the decline can be attributed to the steep drop in commodity prices since October. A recent Economic Letter published by the Federal Reserve Bank of San Francisco proposes that broader inflationary pressures could diminish further as “acyclical” pricing pressures, which include health care, financial services and clothing prices, among other categories, move lower.4
  • The potential for moderating inflationary pressures, combined with policymakers’ more dovish tone this week, could keep short-term interest rates anchored near their current levels. Against this backdrop, income-seeking investors could continue to face challenges well into 2019.

1 Federal Reserve Bank of St. Louis, https://bit.ly/29ecBfp.
2 Federal Reserve, https://bit.ly/2KGk4Ep.
3 Bloomberg, as of November 29, 2018.
4 Federal Reserve Bank of San Francisco, https://bit.ly/2Rp1ljq.

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