there's a joke on Wall Street that
Treasury inflation-protected securities
should actually stand for totally
illiquid pieces of our family show
you'll have to ask a trader but
regardless the tips market is watched
closely as an important signal of
expectations of future inflation because
of the price at which the Securities
trade relative to other Treasuries it's
why so many investors and economists
including at the Federal Reserve which
is meeting to decide monetary policy
today are investigating the same puzzle
right now why have expectations for us
inflation in the next decade slipped so
much on its face this looks a deeply
disappointing signal for policymakers a
suggestion that their attempts to
reflate the economy and to meet their
target of stable annual inflation at
around two percent have gone way off
track even after a rebound in recent
days the markets implying that inflation
in the years from 20 21 to 20 26 will be
down at one point six percent now that
suggests that financial markets don't
really believe in the feds long-term
inflation target and if that's true that
could have real and immediate
consequences what people expect
inflation to be closely effects what
inflation actually turns out to be
because it gets baked into the price
rises the businesses push through or the
wage increases the workers push for the
Fed thinks that survey-based measures of
inflation expectations may be more
reliable than anything thrown up by the
market as policymakers discussed when
they last met in January those surveys
show expectations are still anchored
higher overlay the tips markets implied
inflation measure with the oil price and
things become clearer since oil began
falling in 2014 there's been a tight
correlation between inflation
expectations and the crude price and
while short-term inflation is obviously
affected by oil consumer prices in the
next decade shouldn't be oil cannot keep
falling forever so the more likely
solution to the puzzle is the more
sanguine one the relatively illiquid
tips market has been swept up in the
speculative drama surrounding the oil
price and it no longer tells you very
much
about the long-term inflation
expectations Steven Foley for the
Financial Times