The Federal Reserve’s New Yield Curve

Here’s the latest Cleveland Federal Reserve bank estimates of market inflation expectations—out just last week. They show what I think you’d call the success of the Fed’s adoption of Evans-style conditional targets for inflation and unemployment.

The key thing here is that in the short-term inflation expectations are way up. Market participants who are deciding right now what to do with money are pushed at the margin to avoid super-safe low-yield assets and to either make riskier (or less liquid) investments or to “invest” in the acquisition of durable goods. But over longer horizons, there’s no shift whatsoever. People don’t believe the Fed has lost control of the economy. The higher short-term targets are consistent with longer-term expectations remaining “anchored” basically where the Fed wants them. Unconventional stimulus seems to work in shaping expectations and doesn’t have a downside in terms of longer-term destabilization.