The Federal Reserve's heightened sensitivity to rising inflation expectations could be triggered by a barrage of political ad campaigns that are expected to highlight surging consumer prices ahead of the mid-term elections in November.
The chair of the Federal Reserve.
According to the latest consumer sentiment survey released by the University of Michigan, surging consumer prices will be a major issue for voters in the upcoming elections.
The Federal Reserve used long-term inflation expectations in its decision to raise interest rates this month.
The Fed is likely to try and moderate any further increases in inflation expectations with the central bank showing a heightened sensitivity to any further upward drift in inflation expectations.
Inflation expectations have historically been sensitive to political outcomes, and with high inflation top of mind for voters, it is likely to feature prominently in political advertisements ahead of the mid-term elections.
The firm predicts that political campaign ads will help shape inflation expectations and cause them to go up for the rest of the decade.
Goldman analysts said that the Fed might feel compelled to respond forcefully to moderate rising long-term inflation expectations by raising rates more aggressively.
According to Goldman analysts, the upcoming political cycle will keep inflation top of mind, and consumers might respond to these campaign messages by revising inflation expectations higher. As a result, we see the upcoming onslaught of inflation-focused political advertisements as adding to the risk that the Fed could continue to tighten aggressively even if the economy slows.
Goldman analysts said that rising prices have been a main driver of inflation expectations. The firm predicts that food and gas prices will go up even more if oil prices go up.
The S&P 500 has fallen more than 20% from its record highs into bear market territory due to rising inflation and interest rates. With Republicans hoping to win back control of either the House of Representatives or the Senate in November, there will be more uncertainty. According to an analysis by Forbes earlier this year, the best outcome for markets has always been under a Democratic president. When a Democratic president presided over a split Congress, the S&P 500 rose by an average of 13.6%, while a Democratic president worked with a unified Republican Congress gained an average of 13%.
Powell says that there is compelling evidence that inflation is slowing.
The stock market fell after Powell pledged more big rate hikes to combat inflation.
Powell said the Fed could hike rates by 75 basis points again.
Markets reacted last time the Fed hiked rates.
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