The tilt of the Federal Open Market Committee’s policy decision on Wednesday toward a greater probability of a near-term rate hike is a function of the unfortunate reality of the recent surge in inflation.
A simple look at PCE, core PCE, CPI, core CPI, PPI and core PPI illustrates that they all reside above the current federal funds policy rate, not to mention the Federal Reserve’s 2% inflation target.
Inflation has been above target for more than five years.
We think that this increase is a risk to price stability as investors are forced to reset their inflation expectations higher.
It’s all being driven by the series of economic and supply shocks of recent years, not to mention the strongest boom in capital expenditures in generations. To look through the current supply shock is to court inflation that is structurally higher.
From our point of view, this upward pressure on prices necessitated a removal of the easing bias from the June FOMC policy statement and a move toward what one could justifiably interpret as a tightening bias going forward.
