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ESTIMATING CHANGES IN MARKET EXPECTATIONS OF INFLATION IN RESPONSE TO FEDERAL RESERVE RATE CUTS IN JANUARY 2008

Carolin Schellhorn

Saint Joseph’s University, USA.

 

Rajneesh Sharma

Saint Joseph’s University, USA.

 

ABSTRACT

The calculation of forward rates implied in Treasury spot rates is well known. A simple extension that uses yields on TIPS and similar-maturity conventional Treasury securities to estimate changes in the market’s expectation of inflation is less well known. One interesting opportunity to apply this method arose in January 2008 around the time of two substantial federal funds target rate cuts by the Federal Reserve. Near-term and longer-term inflation expectations appear to have responded differently to the first and second interest rate cuts, which were only ten days apart. After reporting our results, we discuss potential limitations of this method.

Keywords: Treasury securities, TIPS, inflation expectations

JEL Classification: E4, E5, E31