US TIPS breakeven rates stabilize as oil rebounds

10 Inflation may take longer to reach the Fed’s 2% target with oil prices continuing to fall, said St. Louis Fed Pres. James Bullard.

An inflation rate that’s stuck near zero combined with crude at a 12-year low are driving speculation the Fed will delay raising interest rates. The Fed’s preferred measure of inflation is now running at less than one percent, far below target.

The rout in China’s stock market, weak oil prices and other factors are “furthering the concern that global growth has slowed significantly”, Boston Fed President Eric Rosengren said on Wednesday.

The yield differences between Treasury Inflation Protected Securities and regular US government debt, or TIPS inflation breakeven rates, shrank to their tightest levels since autumn.

Household and business expectations about inflation are considered a key component determining actual price increases, and, if they become unmoored to the downside, could pull the rate of inflation lower in a way that is hard to change.

Shares of JPMorgan Chase briefly gained more than 2 percent in pre-market trade after the banking giant reported net income of .4 billion, earnings per share of .32, on revenue of $23.7 billion, beating estimates. December import prices fell 1.2 percent. Thus, while the argument that headline inflation will return to target once oil prices stabilize appears to hold, Bullard noted that it takes longer for CPI inflation to return above 2 percent.

“I would not give it as much credence as markets”. “Nevertheless, with renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome”. “More generally, real personal consumption expenditures growth accelerated during the period of the large drop in oil prices from mid-2014 to mid-2015”.

Bullard, chief executive of the Federal Reserve Bank of St. Louis, spoke to the Economic Club of Memphis at the Holiday Inn on the University of Memphis campus.