Those Pesky Inflation Expectations

The Federal Reserve?s aggressive rate cuts in the last 10 days are having one unpleasant side effect: they’re boosting bond investors? concern about inflation.
The Fed has long looked at the difference between yields on nominal Treasurys and inflation-protected Treasurys (TIPS) for a sense of what investors expect inflation to be. The difference is the so-called ?breakeven? rate — the inflation rate that equates returns on the two. The Fed also tries to strip out near-term inflation disturbances related to fluctuating energy and food prices by looking at what the market expects inflation to be starting five years from now and running for the next five years (i.e. from 2013 to 2108). This is the ?five-year, five-year forward? breakeven rate.
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Original Source

  31 January, 2008| Economy | @ 19:55

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