BoA say that the Federal Reserve is going to discover that it is
going to be extremely hard for the Fed to get inflation back to target in a two-year time span
Analysts at the bank offer up 5 reasons:
We see five possible explanations for the gap between history and the markets:
1. There is something technical going on in the markets and participants don't really expect a sharp drop in inflation.
2. The markets think virtually all the inflation is noncyclical and related to the supply side.
3. They expect a massive recession.
4 The markets think the Phillips curve has gone from remarkably flat to remarkably steep, such that a modest increase in the unemployment rate causes a sharp drop in inflation:
or 5. The markets are ignoring economic history.
We lean toward the first and last explanations - the market is not a good gauge of inflation expectations for 'real people" and investors have an oversimplified view of the link between growth and inflation.
In our view, it is going to be extremely hard for the Fed to get inflation back to target in a two-year time span.
I repeated the 'extremely hard' words, and bolded them. I think BoA are onto something here. Wishful thinking from markets is not going to make it so.
