Markets Are Underestimating the Fed
The recent acceleration in inflation poses significant risks to the current slow normalization approach.
Fed Chairman Jerome Powell is prepped to boost rates further.
Photograph: Andrew Harrer/Bloomberg
The Federal Reserve will release its latest statement on monetary policy today, and although no change is anticipated, it’s becoming clearer that interest rates are too low and the risk of an acceleration in the pace of rate increases is much higher than currently perceived by investors.
The Fed’s doves have successfully advocated for a very slow pace of rate increases because inflation remained below the Fed’s 2 percent target despite the labor market being at full employment. After all, if the labor market were really operating beyond capacity, inflation would be increasing. So the doves could defend their stance by suggesting that inflation wasn’t a problem, unemployment might decline further, and the Fed should not prevent more people from being hired with inflation still below target.