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The expectation of increased inflation is stirring concerns among investors, but the actual market for expected inflation suggests the Federal Reserve is on the right track, as reported by Morgan Stanley.

Key quotes

“The Fed has a dual mandate to maintain both a healthy labor market and stable price inflation. On the former, the labor market is still heavily disrupted; and on the latter, price inflation has been unusually low for a number of years, leading the Fed to think that it’s acceptable if inflation were to be a little bit higher for things to average out. Neither suggests the Fed’s going to turn down that music soon. Indeed, at their most recent meeting earlier this month, the Fed reiterated that they may not raise interest rates materially until 2024 – even as the economy improves.”

“There is an observable, tradable market, for expected inflation and for the moment it’s suggesting the Fed’s strategy is highly credible. That market for expected inflation sees prices running modestly above the Fed’s long run target over the next 2-5 years. But then, those inflation expectations moderate. And so over the next decade, they’re almost exactly at the Fed’s goal. Expected inflation over the next 30 years is a little lower, still. There’s no runaway inflation here.”

“We do think this economic cycle will run hotter than normal and thus may be shorter than normal. But per current inflation expectations, we don’t yet see signs that it will run too hot. It’s an indicator that we’ll be watching.”