Bond market inflation fears are overdone
The risk of a dovish Fed policy error reigniting runaway inflation is dissipating, supported by declining inflation swap rates and structural disinflationary forces in housing and labor.
The argument
The guest argued that inflation swap rates have been declining for several quarters and the Fed funds rate remains restrictive (64 basis points above neutral). Furthermore, structural disinflation in the Zillow Rent Index and a low-turnover labor market with rising unemployment will continue to drag down wage growth and shelter inflation.
The thesis, stress-tested
✓ What validates it
- ✓Continued decline in the Zillow Rent Index three-month annualized rate of change
- ✓Private sector hires and quits rates remaining below pre-COVID trends
- ✓The 10-year Treasury yield adjusting downward toward the 3.0%-3.25% range
▸ Risks discussed
- ▸Tariffs acting as a supply-side shock rather than a demand-side drag, contrary to the guest's model
- ▸A sudden re-acceleration in wage growth or labor market turnover
Hear it yourself
"If you look at slide 54 where we show, trends in in in key inflation swap rates, you know, we've been declining for a couple of quarters now across the one year, two year, five year, and ten year tenure, of these, these inflation swap rates, which suggests that the bond market is getting less concerned about the prospect of a Federal…"
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