©Reuters. FILE PHOTO-Gasoline prices are shown as the cost of fuel continues to rise near record territory in Encinitas, California, United States. May 9, 2022. REUTERS/Mike Blake
(Reuters) – A week that included a still-nasty batch of inflation figures may have marked a change in market sentiment on the Federal Reserve, as inflation expectations fell, bond yields moderated and even prospects for Consumer prices stopped rising.
For its part, a survey of forecasting professionals seems to support the Federal Reserve’s hope that it can rein in inflation without killing millions of jobs in the process.
Estimates of annual inflation a year from now in the Philadelphia Fed’s quarterly survey released Friday dropped to 3% or less, depending on the specific price measure.
Meanwhile, the consensus view on the jobless rate over the next two years rose to 3.8% from 3.6% currently, a result that would excite Fed officials if it comes to pass.
Monetary policymakers, including Fed Chairman Jerome Powell, have been warning American households that the big interest rate hikes they are planning to rein in inflation are likely to be painful in themselves.
The Fed raised its benchmark interest rate by half a percentage point last week and Powell has said increases of the same magnitude at meetings in the next two months are warranted.
“The process of bringing inflation down to 2% (the Fed’s target) will also include some pain, but ultimately the most painful thing would be if we didn’t do it and inflation would entrench at high levels, and we already know how that’s it,” Powell said Thursday on public radio’s Marketplace.
The week’s readings on annual inflation in output, consumer and business levels eased for the first time in months, offering some hope that consumer price increases, which reached 8.5% year-on-year in March, may have peaked.
Although they didn’t slow down as much as expected, investors – rather than further stoking fears of rising inflation – responded to the surprises by calling in bonds and taking yields off multi-year highs.
For the week, the yield on the 10-year Treasury note fell about 20 basis points, the biggest weekly decline since early March, and the 10-year inflation expectation reflected in Treasury inflation-protected securities hit its lowest. level since February.
Indeed, a new benchmark measure of ICE inflation expectations showed the one-year outlook has fallen to around 4.5% from 6% in mid-April.
(Reporting by Howard Schneider and Dan Burns; Editing in Spanish by Juana Casas)