When will the fed act?
Will the Fed raise rates sooner than expected? Inflation the highest in 30 years, a labour market tighter than at any point since the great financial crisis and no Fed action - yet. No wonder we are starting to see them talk about a quicker taper, which would provide the ‘optionality’ to maybe raise rates a bit sooner than expected. We’ve been saying for some time that the Fed cannot ignore all this hard economic data, yet it seemed to be turning a blind eye to all the evidence. Recently though we have seen that it can adjust its uber-dovish stance to something less accommodative, albeit the pace of such transition has been glacial.
But the Fed is going up a notch. We got really the first big ‘inflation alarm bell’ if you like from the FOMC, as minutes from the last Fed meeting said (emphasis mine): “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee's objectives”. Wow, that is a step-change and shows at last the persistence of the inflation and inflation expectations dynamics are starting to worry them.