Impact of Fed's Ultra-Tightening... US Long-Term Inflation Expectations Decline

Jerome Powell, Chair of the U.S. Federal Reserve (Fed)
[Photo by AFP Yonhap News]

[Asia Economy Reporter Park Byung-hee] It has been confirmed that long-term inflation expectations among Americans are declining due to the Federal Reserve's (Fed) aggressive monetary policy tightening measures.

According to the Wall Street Journal on the 11th (local time), the New York Federal Reserve Bank announced that the expected inflation rate three years from now, based on its June consumer survey, was 3.6%, down from 3.9% in May. The five-year inflation expectation also fell from 2.9% in May to 2.8% in June.

However, short-term inflation expectations continued to rise. When asked about the expected inflation rate one year from now, consumers responded with 6.8%, the highest figure since the New York Fed began collecting related statistics in 2013. This is up from the 6.6% expected inflation rate reported in May.

The Fed's strong tightening measures appear to be lowering long-term inflation expectations. In response to the impact of the Ukraine war, which caused U.S. consumer inflation to surge to its highest level in 40 years, the Fed implemented a so-called "big step" in May, raising the benchmark interest rate by 0.5 percentage points at once for the first time in 22 years, and in June, it went further by deciding on a "giant step" (a 0.75 percentage point increase in the benchmark interest rate).

The New York Federal Reserve Bank explained that inflation expectations declined due to growing anticipation that housing price growth would slow down.

In the New York Fed survey, the expected housing price increase one year from now was 4.4%, significantly down from 5.8% in May. The 4.4% expectation was the lowest since February of last year. Additionally, the 1.4 percentage point drop from the previous month was the second largest on record. The New York Fed reported that respondents across all demographics?regardless of age, education level, or income?expected a slowdown in housing price growth.

In contrast to housing prices, gasoline prices are expected to rise by 5.6% one year from now, up from the 5.5% expectation in May.

Considering the still-high inflation rate in the U.S., the decline in inflation expectations can be seen as a positive sign. However, it cannot be ruled out that aggressive monetary policy tightening may spread anxiety about the long-term economic outlook.

On the same day, Esther George, President of the Federal Reserve Bank of Kansas City, stated in a speech, "I definitely agree with the view that the current interest rates do not match the economic situation and that there is a need to raise the benchmark interest rate quickly," but also pointed out, "A very rapid increase in the benchmark interest rate could unsettle households, businesses, and markets."

President George was one of the more hawkish members of the Fed's monetary policy committee, but she was the only one to oppose the 0.75 percentage point rate hike at last month's monetary policy meeting when the giant step was decided.

The "original bond king" Bill Gross mentioned recession risks on his website and advised investors to invest in short-term bonds with maturities under one year. Gross, who has advised caution to investors since early this year, said that although prices for stocks, long-term bonds, and commodities have fallen significantly, it is still risky to buy at low prices. He emphasized that short-term bonds are the best investment alternative when the Fed's rate hikes are highly likely to cause a recession.

This content was produced with the assistance of AI translation services.