Fed now set to hit 2% inflation
By Laurids Rising, Analyst, LR@mamoadvisory.com
Today we have published the October edition of Global Monetary Condition Monitor our monthly flagship publication, which covers monetary policy in 26 countries around the world and gives an overview of global monetary matters and market implications of global monetary trends.
Since we started publishing the Global Monetary Conditions Monitor back in March, we have argued that monetary conditions in the US were too tight for the Fed to hit its 2% inflation target. However, the weakening of the US dollar has effectively eased monetary conditions in recent months. Our Monetary Indicator for the US is now at zero, meaning that we now expect inflation to rise to 2% in the medium term.
To a large extent, the dollar’s weakening seems to have been caused by a softening of the Fed’s forward guidance, which started around April. This is illustrated in the current edition of the Monitor, which gives a sneak preview of our new Forward Guidance Indicator (FGI) for the Fed.
Readers will get a more extensive introduction to the FGI in the Monitor’s next issue, at the end of November. Quite simply, it measures the relative hawkishness and dovishness of language used in the Fed’s official statements over time.
This month, we also present an empirical study of the determinants of 2-year bond yields across countries since 2000.
Our analysis confirms the findings of a similar study of 10-yield bond yields in the previous Monitor. For both 2- and 10-year yields, the key drivers over the past decade have been lower inflation expectations, ageing populations and a re-regulation of the financial sector. Furthermore, we show that the ‘business cycle’ is of rather small importance to both short and long yields.
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