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Treasuries Suggest Fed Can Tame Inflation Without Killing Growth

  • Market-based inflation expectations are ebbing back toward 2%
  • Expected peak in central bank’s policy rate remains below 4%

The bond market is signaling that in the matter of the Federal Reserve versus inflation, its money is on the US central bank.

Demand for inflation protection -- as measured by yields on inflation-protected Treasury debt -- keeps falling. The five-year expected inflation rate implied by those yields is back below 2.6%, down from a March peak of 3.76%. Meanwhile the market’s expected peak in the Fed’s policy rate remains below 4%, and long-dated Treasury yields have rebounded from levels that suggested a recession was in the cards.