Dual mandate: Inflation expectations, Unemployment, Fed Funds Rate

Sources:
Fed H15 http://www.federalreserve.gov/releases/h15/data.htm
NY Fed http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html
BLS

The Fed's dual mandate is theoretically stable prices and low unemployment. There are many different measures of inflation, but one that can be reasonably argued as market based is the difference between the 10 year treasury yield and the 10 year TIPS yield. In the above chart, the difference in yields is labelled inflation expectations. That data is only available back to 2003.

Inflation expectations appear to have completely recovered from the 2008 crash after plunging to depression levels. What has not recovered is the unemployment rate. Based on the recent comments by Bernanke, the Fed is not worried about inflation.

The employment numbers look even more terrible if you look at the raw job numbers that don't ignore people whose benefits have expired. Based on the dual mandate, it is unlikely the Fed will raise rates any time soon. However, if inflation expectations continue to rise, say into the 3-4 percent range, the Fed will have a tough choice to make regarding interest rates.

At the beginning of the graph, you can see the end of the 1% reflation rate set to recover from the 2001 recession. The low rate, held for about 2 years, helped fuel the housing bubble. The even lower rate set by Bernanke has now been in place for over 3 years and I wonder how and where that latent inflation will pop up. We have partial answers right now: stocks, commodities, and metals. Whether those assets will continue to benefit over the next 3 years is an open question.