But actual inflationary expectations may not have declined as much as bond markets imply.
An overheated economy can only exacerbate an incipient deterioration in inflationary expectations.
Such a loss of confidence might then undermine inflationary expectations and raise long-term interest rates.
Furthermore, this inflation would be pre-announced: no-one would have been tricked, and inflationary expectations would remain anchored to the inflationary target.
Tethering inflationary expectations is vital under this regime, which is why central-bank credibility now matters so much.
A good global indicator of inflationary expectations is the price of gold, which has just reached a 27-year high and where market sentiment remains bullish.
Tightening too soon risks pushing the economy again into recession. Waiting too long risks firing up hard-to-reverse inflationary expectations.
Markets generally believe that next year the Central Bank actions continue to be a 2-3 interest rates to curb inflationary expectations, influx of hot money next year will be more positive.
