Over the past six months, financial markets have experienced relatively large moves, and TIPS are no exception. After President Trump’s election, the TIPS market re-priced 10-year inflation expectations from 1.7% to about 2.1% early this year. But as concerns have grown about the new administration’s ability to navigate Congress, the TIPS market has tempered its view, with inflation expectations now closer to 1.85%. At these prices, we continue to like the TIPS asset class.
When the Federal Reserve met this Wednesday, its committee members voted to raise the federal funds rate 25 basis points to a range of 0.75%–1.00%. The market anticipated this move, with futures pricing having indicated more than an 80% probability of a hike as of late last week. We see three central reasons why the Fed opted to raise rates.