And the Fed says…

The Fed did what the market has basically expected and where the fed funds futures were priced, double the taper and with 10 members expecting 3 hikes in 2022 with 5 others saying two. We of course don’t know yet which of this cadre is voting next year.

Here specifically was their commentary on inflation: “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.” No mention of course of the contribution of high home prices and rental increases that the Fed’s policy has induced.

While turning less dovish, they remain optimistic that inflation will soon recede. “Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economy activity and employment as well as a reduction in inflation.”

And while the dot plots confirm the markets expectations of up to 3 rate hikes next year, they defended for now keeping rates at zero “With inflation having exceeded 2% for some time, the Committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.” This could be there desire to give them flexibility on the timing of the rate hikes after QE ends.

Reflecting though a still stale FOMC statement that was not well edited, the Fed left in this sentence: “The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.” Maybe this was their way of defending QE still until it is done in the face of near 7% CPI and 10% PPI.

Bottom line, when debating policy mistakes that some are claiming when looking at the yield curve, we must understand that the mistake has already been made with the Fed waiting so long to get on with this. The Fed entered 2021 with a core PCE estimate of 1.8%. In March it went to 2.2%, in June to 3%, by September they raised it to 3.7% and today it now stands at 4.4%. Their 2022 forecast is at 2.7% from 2.3% previously. Thus, getting the fed funds rate to maybe .75-1% in 2022 will still result in deeply negative REAL rates assuming the Fed is right in their forecast (and they are typically not) and they hike that many times. Thus, this committee remains VERY dovish, less so of course, and has to walk that fine line of countering the sharp rise in inflation via tighter policy at the same time not disrupting markets and an economy that have become so medicated on their policies. We wish them the best of luck.