Capital Account: It’s clear Fed officials are turning less sanguine on inflation—and that explains growing eagerness to start raising interest rates.
This year’s surge is transitoryYet look more closely, and it is clear officials are turning less sanguine—and that explains growing eagerness to start raising interest rates.
While current-year forecasts get pushed around a lot by temporary factors such as a jump in oil prices, the next-year forecast reflects where inflation is expected to settle once temporary factors recede. The message from the Fed’s latest projections is that “transitory” is lasting an awfully long time. Indeed, next year’s projected 2.3% is the highest next-year core inflation forecast since projections were first published in 2007, according to Derek Tang of Monetary Policy Analytics.
What changed? It isn’t because the economic outlook is stronger. In fact, officials now see slower growth and higher unemployment than they did in March. Chairman Jerome Powell explained that some officials simply wanted more confidence the expected recovery would materialize. But inflation risks clearly play a part.
Fed officials think inflation risks are to the upside; a majority said so Wednesday. Six of 18 Federal Open Market Committee participants think core inflation will be 2.5% or higher next year.
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