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Opinion
Lisa Abramowicz

The Fed Is Losing Control Over the Inflation Narrative

Despite the central bank’s more hawkish rhetoric, the bond market is pricing in a faster pace of consumer-price gains in the years ahead.

Bold talk from Federal Reserve Chair Jerome Powell requires bold action.

Bold talk from Federal Reserve Chair Jerome Powell requires bold action.

Photographer: Valerie Plesch/Bloomberg via Getty Images

The Federal Reserve is poised to raise interest rates at the fastest pace in 40 years after policy makers’ hawkish rhetoric turned more aggressive last week. The problem, though, is that bond traders keep boosting their longer-term inflation expectations in a very concerning development for the central bank, the economy and financial markets.

Traders are betting that even with the Fed boosting its target for the federal funds rate by 2.5 percentage points this year to 3%, it won't be enough to get the inflation rate back down to 2% over the next decade from around 8.5% currently. This week, 2-year Treasury note yields surged to the highest levels since 2018 as Fed Chair Jerome Powell endorsed the idea of a half-percentage-point increase when policy makers meet in two weeks and saying many officials view "one or more" such moves as appropriate.