Morgan Stanley on Inflation Expectations - FJElite
The Fed is watching Long-run inflation expectations closely. So far, these have remained steady throughout the past few years and the recent March data. Assuming expectations remain anchored, we expect core inflation to decelerate, allowing for Fed cuts later this year.
Since the start of the conflict, the Fed has adopted a more cautious tone. Powell has emphasised that, to "look through" the impact of higher energy prices, the Committee needs to see continued progress in core inflation. In the same vein, Fed's Schmid recently noted that the Fed cannot simply assume that the inflationary effects of higher oil prices will prove temporary. Together, these remarks reflect a broader concern within the Committee: the risk that repeated headline inflation shocks could begin to influence inflation expectations more persistently.
At the core of this concern is the possibility that long-run inflation expectations could de-anchor. As Fed's Musalem put it succinctly, "anchored inflation expectations are not a God-given truth." If expectations were to become entrenched at elevated levels, restoring price stability would become significantly more difficult—potentially requiring higher interest rates for longer and a more pronounced slowdown in economic activity.
