INFLATION? CALL US IN FOUR YEARS
Just how far is the U.S. economy away from being fully-employed, and thus a real inflation threat at this point? Try 9.1 million (the 6.4 million that have already been lost plus the 2.4 million that are needed to absorb the new labor force entrants but were never created). Considering that in a good year the economy generates 2.0 million jobs, then we are talking about at least four years, if not longer, for the inflation genie to come out of the bottle … and stay there. Hence our pervasive focus on the fixed-income market.
Consider that despite a (i) 0% Fed funds rate, (ii) record 13% fiscal deficit/GDP ratio, and (iii) a $2 trillion Fed balance sheet, inflation expectations are going nowhere. Indeed, the ‘breakeven’ level on 10-year TIPS securities, at 196bps, are fully 74bps below the average of the past decade despite unprecedented volumes of government stimulus.