Today we hear from Bloomberg that some say the answer is yes indeed:
U.S. Treasury notes will extend their decline, pushing 10-year yields to the highest since March, on signs the Federal Reserve is falling behind in its fight to contain inflation, according to a survey of Wall Street's biggest bond-trading firms..
All the dealers expect policy makers to raise their interest- rate target for overnight loans between banks tomorrow to 3.50 percent from 3.25 percent. Twenty said the Fed will increase the so-called federal funds rate to at least 4 percent by year-end. A month ago, just 11 expected the rate to reach that level. By July, the rate will be at least 4.25 percent, 14 firms said.
Actual market bets -- captured from options on federal funds futures -- appear largely consistent with the survey responses reported in the Bloomberg article. One day in advance of the next meeting of the Federal Open Market Committee, estimates of where the federal funds rate will be in October remained roughly where they were last week -- suggesting another 50 basis points across the meeting tomorrow and the meeting scheduled for September 20.
The architects of these estimates always like to remind us that the trends in these pictures are more reliable than the exact probabilities, so the interesting observation is that the 50 basis point bet has failed to drift north, and this is due to a small but persistent probability being placed on a more aggressive trajectory.
A similar story shows up in the November probabilities: By far, the expectation appears to be that the Committee will just keep on keeping on with their "measured pace" of 25 basis point hikes at each meeting through November 1. But, the sentiment in favor of a pause has been drifting down, in favor of a faster-than-measured pace.
Apparently, some bond-market players are not convinced that this is enough to contain inflation. Again,from the Bloomberg piece:
Yields will rise "just on the mere fact that the Fed will be moving more than the market is currently pricing in,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. "The inflation picture won't look as good'' as it has based on current economic growth, he said. RBS expects the 10-year Treasury to yield 5 percent, the highest since June 2002...
"Growth in the second half of the year and inflation will pick up modestly and that will keep the Fed moving rates higher at a measured pace,'' said Conrad DeQuadros, a senior economist in New York at Bear Stearns & Co.
There is much I would criticize in the commentary contained in the article -- an over reliance on the canard that economic growth must be inflationary, the belief that the monetary policy is focused on bursting bubbles in the housing market (which the Chairman has repeatedly denied), and a repeat of the notion that last Friday's wage report was bad news. But here is the best reason to take all of this with a grain of salt:
Economists have been wrong about yields for the past two years as accelerating growth failed to spark faster inflation.
And, I think, James Hamilton would say we won't get that growth either if we aren't careful.
Here's the data from the pictures above:
Download imp_pdf_slides_for_blog_080505.ppt
UPDATE: Mark Thoma reports has the Chicago Board of Trade estimates (which are, not surprisingly, consistent with ours)). Professor Hamilton weighs in. The Capital Spectator has inflation concerns of his own.