Markets Reconsider Reflation
MIG expects inflation to stumble somewhat over the coming months as the effects of the US dollar’s increase ripple through the economy. Recent sluggish inflation prints suggest this is already happening.
Meanwhile, minutes from December’s Fed meeting confirmed MIG’s view of an FOMC that is more cautious and uncertain than the increase in dot plots would suggest. Because of their patient approach and softening inflation, the Fed will have reason to raise rates only twice in 2017.
As we expected, markets have begun to re-evaluate their expectations for reflation and long-term yields have declined about 20 basis points since the December Fed meeting. We expect more declines in yields over the next few weeks as soft inflation data comes in and the Fed’s dovish bias becomes more apparent.​
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