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anjoazul
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Joined: June 18th, 2017, 4:42 pm

How does FED quatify inflation expectation?

September 20th, 2021, 10:07 pm

As I understand the FED considers the employment and inflation expectation when defining the monetary policy. I wonder what is the quantitative indicator or traded instrument FED uses to derive this expectation of inflation? I don't believe the Break Even Inflation is a good explanation, because this inflation expectation is calculate by subtracting the return of TIPs (inflation-adjusted return) from Nominal Return of T-Bond (return with inflation expectation) of the same maturity. As the Nominal Return of T-Bond is already the result of FED's monetary policy, so the FED should has some other approach to quantify inflation expectation. Thanks for you attention!
 
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quantie
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Joined: October 18th, 2001, 8:47 am

Re: How does FED quatify inflation expectation?

September 20th, 2021, 11:27 pm

You have to define “FED” each member of the FOMC & the regional board presidents have their inflation dashboards & pet theory on inflation that is often wrong. Janet Yellen had this for a dashboard https://www.brookings.edu/interactives/ ... dashboard/

Looking at Tips in particular is flawed look at the incremental purchase of TIPS as part of QE vs new supply of TIPS
 
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anjoazul
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Joined: June 18th, 2017, 4:42 pm

Re: How does FED quatify inflation expectation?

September 21st, 2021, 12:15 pm

Thanks you Quantie! Could you pls explain a bit more bout " look at the incremental purchase of TIPS as part of QE vs new supply of TIPS". Thanks!
 
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quantie
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Joined: October 18th, 2001, 8:47 am

Re: How does FED quatify inflation expectation?

September 21st, 2021, 12:38 pm

I think the new supply of TIPs is about 50bn vs 2tn increase in nominals over the last year. The Fed is buying a lot more than the new supply of TIPs so that distorts prices and inflation expectations imputed from TIPs
 
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anjoazul
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Joined: June 18th, 2017, 4:42 pm

Re: How does FED quatify inflation expectation?

September 21st, 2021, 9:13 pm

Thanks Quantie. Do you think if the FED buys too much TIPs and injects liquidity in the market, the fact will also strengthen the inflation expectation?