treasury yields and inflation

Is inflation still on the table or not? Recent Federal Open Market Committee (FOMC) statements indicate they want a rise in inflation before a rate hike happens. With commodity prices soft, this signals a rise in inflation. The question is how much of a rise.

The pace of economic growth remains moderate at best. The Fed’s inflation target of 2% by the end of 2017 seems to be low according to long-term Treasury yields. These yields are 130 bps below the “normal” levels based on nominal GDP growth. Quantitative easingĀ  caused this gap. Long-term rates will likely go up as a response to increased inflation and the link with GDP growth.

Inflation growth may be small, but it’s growth nonetheless. The global scene has more to do with this inflationary cycle.

Two factors that are indicative of inflationary growth are:

  • Foreign exchange reserves
  • Oil exports

Foreign exchange reserves have declined and oil supplies are down. Oil production is down but that’s cyclical. However, there’s enough reduction in supply to help increase long-term Treasury rates.

A Beyond Bulls and Bears article was the source for this post.

Published by mikebertelsen

Global market, trade, and financial news. I keep up to date with what I assess is important.

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