Below is a chart showing inflation expectations across a number of key economic surveys dating back to 2013.  Across the market, there are lots of inflation headwinds for businesses at the moment, but core inflation has likely peaked out for the time being.  Consumers are still reporting steadily (albeit modestly) rising inflation expectations.  On Friday, the University of Michigan released their preliminary consumer confidence data on inflation expectations.  For the period of 5-10 years ahead, median inflation expectations sit at 2.6%, a joint-high dating back to March of 2016.  Other gauges of inflation expectations are also gradually picking up, which should give the Fed some confidence even if core inflation takes a breather into the start of next year.

Markets seem to be coalescing around the view that the Fed is set to hike in December, twice more next year, and then pause for an indeterminate period (possibly the rest of the cycle).  If you hold the view that the economy is not likely to start rolling towards recession in late 2019 or early 2020, then in our view three more hikes for the cycle isn’t a likely outcome.  Of course, it’s important to keep in mind that the Fed is highly dependent on economic data, so shocks (either positive or negative) could roll over in the next year to significantly change that outlook.

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