As we’ve discussed throughout this runup in prices, what the Fed fears more than inflation itself, is consumer (and business) inflation expectations.
If you expect higher prices, you might behave in ways that lead to higher prices (and potentially runaway inflation).
Back in April of last year (as you can see in the chart), that threat was materializing.
But now, look to the far right of the chart, inflation expectations are tame, and well under control.
So, where does the Fed go from here? Again, despite hotter prices in January, we haven’t heard the reactionary tough talk (i.e. threats against markets and the economy) from the Fed this time.
To the contrary, two Fed Presidents and the CEO of the country’s largest bank all used the word “little” to describe how much higher rates will go from here. Bottom line, the rate path expectation that has been built into markets (and the economy) haven’t changed with the latest inflation data.
And don’t forget, the Fed needs inflation, while under control, to run hotter than average for a bit longer.
Remember, back in September of 2020, Jerome Powell made an official policy change in the way they evaluate their two percent inflation target. Because inflation had been too low, for too long he told us he would let inflation run hot, to bring inflation back to 2% on average over time.