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Treasury Yields Drop on Fed Minutes Inflation Chatter, Lowered Expectations from Washington

Looks like the Fed is starting to accept the “new normal.”  Today’s release of Fed notes from the July 17 policy meeting indicate that the policy setters “saw some likelihood that inflation might remain below 2% for longer than they expected.”  The Fed has been clinging to “classic” economic theory (pre-crash) that dictated that full employment leads to inflation (especially wage inflation, which is part of the Fed’s stated mission).  Now, after a period of describing low inflation readings as “transitory” or “seasonal”, reality is setting in that wages are not rising as planned.   Much of this may have to do with generational factors and other macro structural changes in the post crash economy.  Low inflation may be a secular reality.   The minutes release combined with today’s mass defections and disbanding of the Manufacturing Council and Strategic Policy Forum (indicating more Washington dysfunction) caused investors to assume a more gradual pace of rate hikes and no growth inducing fiscal policy.  Stay Tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners