Inflation fears rise as Fed survey’s one-year outlook hits highest level since May 2023

Inflation fears intensified in September, pushing the short-term outlook in the New York Federal Reserve’s monthly survey to its highest level in nearly three and a half years.

The central bank’s survey of consumer expectations said the median forecast for inflation over the next 12 months reached 3.9%, up 0.3 percentage points from August and the highest level since May 2023, when the figure was 4.1%.

Similarly, the survey reveals that household spending growth is expected to reach 5.5%, also a 0.3 percentage point month-on-month rise and the highest since May 2023.

The results come as Fed officials struggle to properly set monetary policy, while inflation remains well above the central bank’s 2% target.

Markets widely expect the Federal Open Market Committee to keep benchmark rates steady when it meets later in October. Inflation in August was lower than expected, according to the Fed’s preferred gauge. In recent days, several key officials, including New York Fed President John Williams, have said policymakers can afford to take their time when evaluating where interest rates should be set.

The survey found that the outlook is better anchored in the longer term. The three-year expectation increased slightly by 0.1 percentage point to 3.3%, while the five-year expectation remained unchanged at 3%.

However, market indicators are less positive.

A closely watched bond market indicator, known as the breakeven point, shows the five-year outlook hovering around its highest level of the year, at 2.35%. Treasury yields have soared in recent weeks, reaching levels not seen since the turn of the century.

Fed officials view expectations as a key driver of inflation.

While expecting the Fed to stay put at its next meeting, markets are anticipating a much more aggressive central bank in the years to come. Fed funds futures imply a rate of 5.58% five years from now. The current funds rate is targeted between 3.75% and 4%.