China’s “no stimulus” pledge and falling commodity prices are sending US inflation expectations to multi-year lows. Below is the 5-year inflation expectation indicator (breakeven) implied by inflation-linked treasuries (TIPS).
The 5-year real rates in the US have recently turned positive, which some would suggest represents tighter monetary conditions. With real rates on the rise, the Fed will have a great deal of room to stay put on rates. If inflation expectations fall further, expect a more dovish stance from the FOMC.
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