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Federal Reserve governors don’t want to make news. If the Fed is a topic of discussion, that is a tell-tale sign that people think they are doing something wrong, or that they are under pressure. And at the Federal Open Market Committee (FOMC) meeting this week, Powell certainly wants to create as little excitement as possible. It comes just before the G20 meeting in Japan that is billed as the next opportunity to seek a resolution to the trade dispute between the U.S. and China. To cut immediately ahead of it would be seen as an attempt to strengthen the U.S.’s hand, and an abdication of Fed independence. The continued efforts by the president to bully the Fed into cutting rates make it even more important for Powell to keep his head down and not make waves.
But Powell has no choice but to make a lot of news. First, he must contend with a remarkable shift in the market for inflation-protected securities which suggests that the market has lost all confidence in the Fed’s ability to keep inflation close to its official target of 2%. The break-even rate for inflation over the next 10 years is now its lowest since the presidential election in 2016, and shows that we are once more in the grips of a deflation scare: