EC Will The Fed Keep Inflation Contained?

Nonetheless, there’s plenty of speculation swirling that the Fed will intentionally remain asleep at the switch if inflation proves to be less than transitory. But for now, this is guesswork and there’s minimal, if any, reasoning to suggest that its captures a likely scenario for the months and years ahead.

The bigger risk is that the Fed remains attentive and acts responsibly but gets the timing wrong and allows the inflation genie to escape. But recent commentary from Fed officials suggests this is a misplaced concern, at least for now.

As Tim Duy at SGH Macro Advisers tells clients in a research note this week:

The Fed’s hawkish turn is primarily about a belated acknowledgement of the strength of the data rather than a shift in the reaction function. That said, within the reaction function there are still moving pieces to consider that provide some policy flexibility. The Fed’s decision to place a high priority on controlling the tapering discussion limited debate on those moving pieces and encouraged a widespread perception that the Fed was more uniformly committed to a particularly dovish interpretation of the data and framework than was the case. That perception cracked last week.

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Disclosures: None.

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