Go to:

May 2018
< Apr Jun >
Leaguer Email Subscription

You are not currently subscribed. Click Subscribe below to receive the Leaguer email.

Falling Inflation Rate Not a Good Sign for Credit Unions
Thursday, December 11, 2014 6:40 AM

An inflation gauge closely watched by Federal Reserve officials has fallen to the lowest level since the financial crisis, potentially complicating the interest-rate outlook as investors brace for a likely Fed rate increase as soon as mid-2015.

The five-year forward inflation breakeven rate hit 2.0185 percent this month, the lowest since Dec. 31, 2008, according to the latest data provided by Rabobank.

The gauge measures what the average inflation rate will be during a five-year period starting from five years from today, in this case between 2019 and 2024.

The falling inflation expectations help to explain the sharp decline this year in benchmark Treasury yields. The 10-year U.S. note on Tuesday yielded 2.22 percent, down from 3 percent at the end of 2013 and far below the forecasts of many Wall Street strategists. The 10-year U.S. notes are a benchmark for mortgage loan interest rates.

Few expect the U.S. will slip into deflation. But market analysts say falling inflation readings could further slow Fed plans to raise the fed funds rate, which has been near zero since the crisis. The low rates are a good deal for consumers on the lending side but lousy for them on the savings side. And the incredible low rates causes the banking industry to struggle making margins.

Some other market-based inflation expectation gauges in the U.S. government bond market have fallen below the Fed’s 2 percent target. The 5-to-10-year inflation outlook from the monthly University of Michigan/Thomson Reuters consumer sentiment survey last month fell to 2.6 percent, the lowest level since 2009.

While Fed officials have taken note of low inflation expectations, Fed Vice Chairman Stanley Fischer and New York Fed President William Dudley highlighted the benefits of lower energy prices to the U.S. growth outlook. Cheaper energy costs allow U.S. consumers to spend more money on other items.

Interest rate futures markets show many investors expect the Fed to start raising interest rates during the second half of next year. Economists at Goldman Sachs Group Inc. expect the Fed to raise rates in September 2015.

But Mr. O’Donnell said the Fed could push out the timing of an interest-rate increase to 2016 if inflation remains below 2 percent.


Source:  The Wall Street Journal, 9 December 2014