Yesterday Ben Bernanke kinda sorta said that the Fed might taper off its bond buying program slightly earlier than expected. Maybe. Naturally, markets went nuts. I ignored it, because I figured it was just Wall Street doing what Wall Street does: panicking over everything. Either that or the robots that do most of the trading were engaged in a few trillion epic microsecond battles. But it would all settle down before long.
As it turns out, investors might have been reacting to bad news out of China as much as they were to Bernanke. Who knows? In any case, stock markets fell, interest rates rose, and commodity prices dropped. No surprise there. But Neil Irwin points out something else: inflation expectations plummeted. Not right away, though. Not until this morning, when five-year inflation expectations dropped sharply from 1.86 percent to 1.76 percent.
So what caused this? If it were Bernanke, it would have happened yesterday. Is it generalized fear that the slowdown in China is going to hurt the global economy, which will lead to lower inflation in the U.S.? A reaction to the rise of the dollar? It’s puzzling—and the size of the drop is puzzlingly large and sharp. What’s worse, the Keynesians and the market monetarists are sure to provide us with diametrically opposite explanations of why this happened, which will keep us all even more puzzled.
But that said, current inflation is under control and inflationary expectations—for whatever reason—are obviously pretty firmly under control too. This is exactly the opposite of what we want, so it’s bad news no matter what the reason.