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00:00Obviously, the market reaction here is a little bit surprising in the sense that the stock market is basically now unchanged, at least before we open. What you're seeing in the long end is certainly somewhat worrisome. The yield curve is steepening telling you that the market is expecting that rate cuts are coming because this seems to be at least more likely given recent discussions, including Jay Powell on Friday. But also that the long end has moved higher is obviously equivalent to beginning to think about that. Maybe there is a risk that inflation is going to be a problem for a longer period than what people thought just a few days ago. The conclusion from a broader perspective is obviously a discussion around, well, maybe we should just begin to think about when we say rates are higher for longer than maybe it's long rates that will be higher for longer, not only for fiscal reasons, but also now because of this emerging debate, not only because of what Powell said last Friday in Jackson Hole about the framework, but also about this issue and about, well, what would the composition of the agency look like? Are they going to allow essentially to the inflation target to be higher than what it has been just for the last seven years? Really zeroing in on the shape of the yield curve, though, in talking about duration getting hit. It is the 30 year yield. It's a ten year yield which hasn't moved as much as you'd expect if the issue is is more persistent, persistent inflation. The ten year yield also would be moving higher. Tens thirties curve is the steepest since 2021. Why is the 30 year yield specifically acting as the release valve? Well, there's just more sensitivity in the form of duration and the very long end. So ten year rates, of course, are not down as much as two year rates. So really, it is the whole yield curve that is just deeper. And you're right, the ten year rate basically being only down a little bit here as we speak is certainly also telling us that it really is the very long duration exposure, those with very long duration exposure rates, which are matching their long duration liabilities, they are the ones that are reacting to this. Mainly worrying about that 30 year is where most of the action has been. But you're right, it is a little bit peculiar. We look at it here and say, well, why a thirties moving so much more than tenths? But I think it is just a reflection of the whole yield curve steepening here. That is going to take some time now to digest. And as Mike also was just saying, well, what exactly will be the scenario we have now ahead of us? Is this going to change the composition of the FOMC or what will the FOMC they look like, especially when we come to the other side of February next year. So is it your assumption if we get more doves appointed to the FOMC, more people who are maybe less willing to listen to the arguments of the White House, that it's the inflation target that changes that, that's the main mechanism. I absolutely think that we should all think of this as essentially a change in the inflation target We have now for 30, 40 years. Being used to the inflation target is 2%. If I own treasuries, my fixed income portfolio will be eroded by 2% every year. And if inflation now is allowed to be higher for longer, and if Jay Powell now last Friday said that the change in framework away from flexible average inflation targeting also will allow inflation to be higher for longer. That means that bond investors should begin to think about that. It is simply the same as saying that the inflation target will also be higher, not necessarily significantly higher than two. But even if you go up to two and a half and three over time, that's a fairly significant erosion for fixed income investors, especially in public markets.

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Economist Slok Sees a Change to Fed’s Inflation Target

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