Traders' Doubts Fed Can Hit Inflation Goal Underscore CPI Risks

By Garfield Reynolds, Bloomberg Markets Live reporter and strategist

The Treasury market is palpably on tenterhooks going into this week’s inflation release, especially after payrolls joined the long list of data releases to come in stronger than expected. Bond traders’ inflation expectations have surged this year to signal doubts the Fed can meet its goal, meaning risks are tilted to the upside for yields going into Wednesday’s CPI release.

While the pace of consumer-price gains is expected to ease, even the most optimistic economist forecast still sees headline annual inflation above 3%. Surging oil and other commodity prices aren’t helping, and the same goes for supply disruptions that threaten to undo the goods disinflation that has helped cool costs in the economy.

That helps explain why two-year breakeven rates have climbed to ~30bps under Feb. CPI. If average inflation does come in at the 2.85% or so now envisaged by TIPS then it’s possible the Fed doesn’t reach its target in that time frame. That casts doubt on the capacity of policymakers to deliver on their projected six rate cuts through the end of next year.