Flexible Average Inflation Targeting (FAIT) is the name of the Fed game, but that does not give us much guidance on what will be the activity of the Fed nor are markets playing as expected.
Inflation is higher than expected - There is no transitory inflation albeit the trimmed core PCE is still close to target at 2.6%, but there are some statistical gymnastics to get to this number. Top-line PCE inflation is at 5%, CPI is higher, and PPI is even higher.
The taper has been increased to double in December and another doubling in January 2022. The taper will be pushed forward to end in March and three hikes are planned for 2022. The dramatic change is present in the dot-plot changes from September.
Flexible is not supposed to lead to a policy about-face. The fundamental approach to central bank is to provide clear guidance of gradual change with swift action in a crisis. This December announcement is not gradual and does suggest an inflation crisis. Yet, the markets have taken this in stride and acts as though this action was completely expected, so as we move to the last two weeks of the year, we are left with markets expecting front-end Treasury yields higher and long-dated bonds acting as though an economic slowdown which will dampen inflation as a given. Our FAIT will be in the hands of central bankers that do not have clarity on inflation, full employment or the link between policy and the real economy.
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