Inflation Key to Fed Pause in 2019
FOMC participants are so confident in their gradual tightening strategy that many are pushing for it to continue through next year. Their confidence is at odds with the markets, however. This is not unusual. The Fed’s understanding of the economy runs two to three months behind traders’ because the Fed downplays new information until a trend is evident. Plus, the FOMC’s reliance on a single-factor inflation forecasting approach – US labor slack is the sole determinant – ensures they miss important inflation clues tracked by traders. As a result, 10-yr yields are likely to fall significantly by the middle of next year in reaction to accessive tightening.Plus "The Week Ahead," a preview of next week’s potentially market-moving events.