A just-published report updated our views on the outlook for Fed policy and the U.S. Treasury market, in view of last week’s FOMC rate hike. While many pundits are now calling new Fed Chair Warsh a hawk for his tough inflation talk and for voting to lift rates 25 bps, we continue to view the Fed as being well behind the inflation curve.
The Fed again lifted its projection of the median longer-run policy rate to 3.2% last week, but this remains far too low for an economy that continues to grow well excess of its potential rate at a time when there is little economic slack, when fiscal policy is highly stimulative and the budget deficit is massive (i.e. at levels only previously seen during recessions), while inflation continues to drift further away from the Fed’s 2% target.
In simple terms: still accommodative policy + still above-target inflation (for 5+ years!) = an unwillingness to deliver the Fed’s inflation mandate.
