Goldman Sachs: Fed Overshoot Not (Yet) Priced in Inflation Markets

Tuesday saw Goldman Sachs note that "much of the fluctuation in inflation swaps and breakevens over this year can be attributed to changes in liquidity risk premia. Medium-term inflation expectations, which declined sharply in March, have not recovered, and the inflation risk premium is largely unchanged, according to standard models. The flattening of the breakeven curve also looks inconsistent with rising medium-term inflation expectations. These facts suggest that the upcoming likely adoption of Average Inflation Targeting (AIT) by the Fed is not as yet a factor in moving medium-term inflation pricing higher. Historical experience from the late 1960s through the early 1990s suggests that structural shifts in inflation expectations take time. As a result, we do not expect formal AIT adoption to lead to a structural shift in inflation immediately, and maintain our near-term 2.1% target for 5y5y inflation swaps. As the recovery progresses, we would expect further upside relative to that target, but within the highs observed over the past decade."