Chart of the Week31 Jan 2025
Disagreement driving inflation doubts
We'd expect breakevens to edge lower as real rates rise as investors trust that the higher yields they’re pricing in will help alleviate inflation pressures. However, a decline in the ratio of US reals relative to BEs is telling of a broken transmission function between the market’s policy expectations and inflation outlook. This faltering response function has coincided with a pickup in disagreement among FOMC voters as measured by the standard deviation in net hawkish/dovish media tone among voting members. The relationship suggests that greater inconsistency in policymakers' messaging has cast doubts on whether Fed policy will prove sufficient to tame inflation.