U.S. Inflation Outlook Slumps to Six-Year Low as Fed Sees Pickup

  • Five-year break-even rate falls below 1% to lowest since 2009
  • San Francisco Fed's Williams sticks to call for 2% inflation

The Treasury market is signaling inflation expectations in the U.S. are tumbling, even as Federal Reserve officials stick to forecasts for a pickup.

The difference between yields on five-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, fell below 1 percentage point Tuesday. The so-called break-even rate is the lowest in six years, after dropping the most in more than eight months on Monday.

The outlook for inflation is falling as stocks and commodities tumble. By contrast, Fed officials keep warning price gains are poised to quicken and they’re preparing to increase interest rates. San Francisco Fed President John Williams said on Monday he expects inflation to gradually quicken to the central bank’s 2 percent target.

“The break-even rate declined considerably yesterday,” said Kei Katayama, who buys Treasuries for Daiwa SB Investments in Tokyo, which oversees $48.5 billion. “At the same time, the Fed is trying to calm down the market, saying the U.S. economy is healthy.”

The five-year break-even rate was at 0.99 percent as of 7:13 a.m. New York time after dropping to 0.98 percent. It fell nine basis points Monday, or 0.09 percentage point, the most since Jan. 6.

Treasuries were little changed Tuesday, with the benchmark 10-year note yield at 2.10 percent, according to Bloomberg Bond Trader data. The yield fell seven basis points the previous day. The price of the 2 percent security due in August 2025 was 99 1/8.

Preferred Gauge

The Fed’s preferred inflation gauge has been close to zero all year as slowing economic growth in China sends commodity prices down and threatens global economic expansion.

The Standard & Poor’s 500 Index fell 2.6 percent Monday and crude oil futures tumbled 2.8 percent, with their value cut in half over the past year.

The Fed cited global risks when it refrained from raising rates at its Sept. 16-17 meeting. Yet it maintained its forecast for inflation to accelerate back to its 2 percent target over the medium term.

Williams said Monday he expects the Fed to increase rates this year. New York Fed President William C. Dudley said the central bank will probably act in 2015 and move rates higher gradually thereafter.

Williams votes on the policy committee in 2015 under the system of rotating regional Fed bank presidents through the panel. The head of the New York Fed has a permanent position in the group.

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