Monetary Policy & Inflation | US
The Fed Has Fallen into a Time Inconsistency Trap, Can it Recover?
- By Dominique Dwor-Frecaut and Jon Turek
- 4 min read
The June FOMC meeting turned out more hawkish than we expected, which reflects both a change in the Fed economic assessment and its reaction function. In the presser, Chair Powell was very confident on the prospects for a strong recovery. He repeated many times that ‘we are on a path to a very strong labor market’.
In addition, the FOMC has become more concerned by the risk of de-anchoring of inflation mainly due to the high April and May inflation prints. Chair Powell repeatedly implied that the Fed would not hesitate to tighten policy if inflation expectations de-anchored. Finally, he conveyed greater confidence that the Fed can lift inflation: ‘I have more confidence that we could see inflation above 2 percent, that it may not be as hard to do that as we thought, and that inflation expectations may move up’.
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