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

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."