The guest commentary below was written by Jesse Felder of The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.

"Managing The Inflation Narrative" VS. ACTUALLY Managing Inflation - See No Inflation  1

Today, the Fed is set to announce another rate hike of 75 basis points, taking the funds rate to 2.25-2.5%.

And while inflation running over 9% appears to indicate that the debate over whether inflation will prove “transitory” has seemingly been won by the “not” crowd, markets are still pricing in a rapid decline in inflation.

Some point to these “market-based” indicators of inflation expectations, derived from the yields of Treasury Inflation-Protected Securities (TIPS), as evidence the Fed is on top of the inflation situation.

"Managing The Inflation Narrative" VS. ACTUALLY Managing Inflation - Screen Shot 2022 07 27 at 9.55.46 AM

However, there is a major problem with using TIPS-implied inflation expectations as a report card for Fed policy and that is the fact that the Fed, after buying up more than a quarter of the total outstanding, is now the single most dominant force in the market for TIPS!

To some degree then the Fed, in managing its TIPS portfolio via QE and QT, is able to write its own report card. And this at least creates the temptation to try to manage inflation more by controlling the narrative than by actually addressing it directly.

EDITOR'S NOTE

This is a Hedgeye Guest Contributor piece written by Jesse Felder and reposted from The Felder Report blog. Felder has been managing money for over 20 years. He began his professional career at Bear, Stearns & Co. and later co-founded a multi-billion-dollar hedge fund firm headquartered in Santa Monica, California. Today he lives in Bend, Oregon and publishes The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.