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The Federal Reserve often talks about how inflation data and employment trends matters when they are crafting monetary policy. Finally, we have some good news: all signs point to lower inflation over the long-term.

As you know, their mandate from Congress is to stabilize prices and support full employment with a dynamic monetary policy (as best they can). As we saw recently, the Federal Open Market Committee chose to cut rates sharply by 50bp to bring ease a very restrictive monetary policy.

Data is in favor of lower inflation

This was done intentionally, as the data seems to be in favor of lower inflation. If you look at inflationary expectations over the next five years (something the committee looks at closely), the figure is currently at 2.26%. This is nearly in alignment with the Fed’s target goal of 2% annual inflation. That is great news for the economy, the dollar, and consumers, especially after a sharp rise in inflation during the pandemic.

Further, the five year breakeven inflation rate is about the same level as it was in September. In September, it was below 2% – the first time since January 2021. More needs to be done to bring inflation down to acceptable levels, and that might even mean tolerating some deflation for awhile. The Fed is seeking a soft landing, but historically, that has been elusive.

Without getting too granular, the employment data shows a pretty strong job market that has plenty of openings for anyone willing to work. Rates of pay are elevated and competitive; companies are willing to bump pay to hire the right employees. You might think that sounds like a perfect situation, and you would be right.

Why does this matter to us as traders or investors?

Understanding of the dynamics around Fed policy and inflation expectations is great information to have. Eventually, the markets come around to embrace (or at least accept) monetary policy. We should see this playing out in the markets sooner rather than later.

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