BlackRock Investment Institute

Macro insights

The Fed's communication challenge

Federal Reserve officials surprised markets earlier this month by embracing higher inflation and heralding a lift-off of rates in 2023, rather than 2024. The market response – in particular in breakeven inflation rates – underscores the essential role that clear communication plays in boosting the credibility of the Fed’s new framework.

Say what now?

Chart showing breakeven inflation and FOMC meetings

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, June 2021. Notes: The breakeven inflation rate represents a measure of expected inflation and implies what market participants expect inflation to be in the next 10 years, on average. The yellow lines mark this yea's Federal Open Market Committee (FOMC) meetings.

Ten-year breakeven inflation – a market-implied measure of inflation expectation - tumbled to the lowest level since March after the Fed news. See the chart. This suggests that investors interpreted the Fed’s signal as a move out of step with its new framework that aims to deliver moderately above-target inflation for some time. Investors were keen to price in a pace of rate increases we would see under the Fed’s old framework, not the new one, in our view.

We believe the Fed remains committed to its framework, but see the need for greater clarity around how the framework works. Case in point: Last week a number of Fed speakers reasserted their dovish policy stance – and breakeven inflation recovered substantially.

Recent macro insights

Manufacturers to slow production
Manufacturers have slowed production substantially in both the U.S. and the euro area, according to survey data.
Financial conditions tightening fast
U.S. financial conditions have tightened a lot since the start of the year – in other words, financing is becoming more costly for individuals and companies. Since then, th...
Less optimism on growth
Economic growth forecasts for this year and the next are coming down rapidly. The OECD last week followed the World Bank in downgrading growth forecasts.
Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

Stay ahead of markets with the latest insights from the BlackRock Investment Institute.

Please try again
First Name *
Please enter a valid first name
Last Name *
Please enter a valid last name
Email *
Please enter a valid email
Investor type *
This field is mandatory
Location *
This field is mandatory
Company *
This field is mandatory
Thank you
Thank you for your subscription!
We usually publish weekly insights on every Monday. Expect to receive your first newsletter from us this upcoming Monday.