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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Knighty Tin who wrote (37535)9/19/2005 6:21:47 PM
From: mishedlo  Read Replies (2) of 116555
 
Now, after Katrina, inflation expectations may have come unglued. Furthermore, consider this: Assuming the survey accurately represents inflation expectations, prior to Katrina, the real fed funds rate was 0.4%. After Katrina, the real rate is now negative 1.1%. In other words, policy just became a lot more accommodative, and the neutral point shifted up more than 100 bp! That is nothing short of a big leap, and whether it is temporary or not remains to be seen (gasoline prices have headed lower, but higher home heating costs are expected this winter). I think that the Fed will want to make sure this is a temporary inflation expectations reading, and that means higher rates. David Altig notes that the previous outlier in inflation expectations was a short-lived but sharp drop following 9/11. It is worth remembering that the Fed followed the attacks with aggressive rate cutting. Wouldn’t the appropriate strategy now be the opposite?

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