Kevin Warsh made a sharp point yesterday: the Fed has been missing its inflation mandate for over 5 years straight. Yet market-based inflation expectations — like the 5y5y forward breakeven — have barely budged.
Think about that for a second. The Fed's been getting it wrong for half a decade, but the bond market acts like everything's fine. Either the market still believes the Fed will eventually figure it out, or these measures are just less reliable than we think.
My take? Markets price in what they think will happen, not what's already happened. Traders still trust the Fed's long-term commitment to 2% inflation, even if the execution has been messy. The alternative — pricing in permanent inflation failure — would mean repricing everything. Nobody wants to be the first one out that door.
But here's the uncomfortable truth: if the Fed keeps missing for another few years, that credibility anchor starts to drag. And when market expectations finally do move, they don't drift — they break.
Think about that for a second. The Fed's been getting it wrong for half a decade, but the bond market acts like everything's fine. Either the market still believes the Fed will eventually figure it out, or these measures are just less reliable than we think.
My take? Markets price in what they think will happen, not what's already happened. Traders still trust the Fed's long-term commitment to 2% inflation, even if the execution has been messy. The alternative — pricing in permanent inflation failure — would mean repricing everything. Nobody wants to be the first one out that door.
But here's the uncomfortable truth: if the Fed keeps missing for another few years, that credibility anchor starts to drag. And when market expectations finally do move, they don't drift — they break.
