The gap between rates on regular and inflation-protected bonds suggests
that consumer prices in the United States will rise only 1.6 percent a year in the next five years, down from 2 percent in March.
In other words, the jobs side of the mandate would seem to offer Ms. Yellen
and her colleagues a green light to raise rates steadily to keep the economy from overheating, while the inflation side would seem to offer instead a yellow light, and arguably a red one.
What is worrisome is not direct economic damage, but the fact
that the Fed has missed its (arbitrary) 2 percent target in the same direction — undershooting — year after year.
And the Consumer Price Index, excluding volatile food
and energy prices, rose 1.7 percent over the year ended in May, down from 2.2 percent in February.
It’s probably not worth obsessing too much over prices rising 1.5 percent instead of the targeted 2 percent.
Even for the five years after that, the rate of inflation implied by bond prices has fallen from 2.1 percent to 1.9 percent.
She is a labor market scholar, after all, and in her view the labor market looks pretty darn good, with a 4.3 percent unemployment rate
and the economy still producing more new jobs than it is new workers.