Fed's faith in anchored inflation expectations may be coming under stress

Rising household inflation expectations, higher gasoline costs, and upticks in U.S. Treasury yields are creating headwinds for the Federal Reserve's effort to keep inflation psychology in check. The convergence of firmer consumer expectations and rising bond yields increases the risk the Fed will need to maintain a hawkish stance, which could keep upward pressure on borrowing costs and weigh on risk assets.

Analysis

Rising household inflation expectations, higher gasoline costs, and upticks in U.S. Treasury yields are creating headwinds for the Federal Reserve's effort to keep inflation psychology in check. The convergence of firmer consumer expectations and rising bond yields increases the risk the Fed will need to maintain a hawkish stance, which could keep upward pressure on borrowing costs and weigh on risk assets.