The Federal Reserve Bank of Cleveland published research suggesting that financial markets have priced in a stronger Federal Reserve policy response to inflation surprises in the post-pandemic period. The analysis infers this from heightened sensitivity of two-year US Treasury yields to unexpected inflation, indicating a shift in the market’s perceived Federal Open Market Committee reaction function. From 2022 to 2024, two-year yields rose by an average of 0.71 percentage points when core Consumer Price Index readings were 1 percentage point above expectations, around four times the sensitivity seen in 2004 to 2008 (0.18) and 2015 to 2020 (0.13). Over time, two-year yields also became less responsive to other indicators such as core retail sales and new-home sales. The authors point to two potential drivers: the FOMC’s greater public emphasis on lowering inflation in 2022 to 2024 and reduced investor attention to inflation-related news in earlier years when inflation was low and stable, noting the two mechanisms may interact.
Federal Reserve Bank of Cleveland 2025-03-11
Federal Reserve Bank of Cleveland research finds markets expected a more aggressive Federal Reserve response to inflation surprises after the pandemic
Research from the Federal Reserve Bank of Cleveland shows financial markets expect a stronger Fed response to inflation surprises post-pandemic. From 2022 to 2024, two-year US Treasury yields rose by 0.71 percentage points when core CPI exceeded expectations by 1 point, reflecting the Federal Open Market Committee's focus on reducing inflation.