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.

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Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

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