The Odyssey Toward 2 Percent
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Key Views
The bank's economists believe the disinflationary trajectory toward 2% is underway, projecting core PCE to average approximately 2.2% over the second half of the year. Tariff-driven price impacts have largely run their course as one-off adjustments, while concerns over energy-price pass-through have eased amid recent oil declines. Waller's message emphasized avoiding both a repeat of 2021–2022 policy errors and excessive tightening that could trigger recession. The labor market is not overheating, wage growth is compatible with the inflation target, and expectations remain well anchored.
Outlook
Front-end US CPI swaps still have room to decline, particularly as trimmed-mean indicators confirm moderating core inflation. The current divergence between short-dated inflation swaps and the SOFR futures curve suggests markets are overpricing near-term price pressure relative to the implied policy path. The report expects gradual curve steepening even if oil prices remain elevated.
Recommended Securities
- Short or downside positioning in US front-end inflation swaps
- US yield curve steepeners
- Intermediate-duration US Treasuries
Key exhibits
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