Hamilton Reads the Tea Leaves
Real yields are up about 40 basis points, while nominal yields are up 80. The increasing gap suggests that investors may be anticipating about a half a percent higher long-term inflation rate than they were anticipating at the start of this year.
Bernanke may think we've got a solid anchor, but this boat seems to be drifting.
If the only incoming data had been the new indications of a pending slowdown in real economic activity, the logical call for the Fed would be to hold the rate constant. If the only incoming data had been the new inflation numbers, the logical call would be for a rate hike. But just what is the logical thing to do when both come at the same time?
I'm not sure, but just for fun let me hazard a guess of what the FOMC might do. The rising gap between nominals and TIPS is a hard number already in hand that we can point to, while the rest we see through a glass, darkly. So I'll throw my hat in the ring by predicting another hike in the fed funds rate to 5.25% at the end of June.