Free Trial

/INFLATION: Goldman: Fed Review A LT Dovish Shift, Ltd ST Impact

US SWAPS

Goldman Sachs note that "the Fed's framework review delivered a flexible form of average inflation targeting (AIT) that stopped short of offering concrete numerical commitments, in laying out an approach where periods of persistently below 2% inflation are followed by an inflation aim "moderately above 2 percent for some time." Coupled with the change to "shortfalls of employment from its maximum level" from the previously used "deviations," our economists view the results as a significant dovish long-term shift in the framework, but broadly consistent with expectations. Some market participants may have been expecting more concrete guidance, resulting in an initial disappointment in inflation markets, though it was followed by a retracement. With an early release of the framework, we now expect more details on the policy (as opposed to the framework) at the September FOMC. However, markets appear to already be pricing strong forward guidance at this point, and this too may not be a catalyst for significant reassessment in inflation markets in the near term. We have been bullish US inflation in some form for a while now, and while we remain constructive, the rally has already been substantial. Further, where inflation had seemed "cheap" to our framework before, we no longer find it mispriced, leaving additional near-term upside largely tied to the economic recovery. While the formulation of AIT can be a source of further upside in the medium term, we expect markets will likely take time and require greater clarity in terms of how it will be functionally carried out before such a shift materializes. We maintain our long 5y5y inflation swap recommendation, but now switching to a trailing stop."

MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.