It's time for Kevin Warsh's big debut as the new chair of the Federal Reserve. The Federal Open Market Committee meets this week, and will make an interest rate decision by Wednesday.
Markets expect that the FOMC won’t do much of anything for now. But the backdrop to this meeting is anything but calm, as Warsh takes the reins from Jerome Powell, who faced relentless pressure from President Trump to cut rates.
This current bout of inflation is tricky for the Fed because it’s driven by a spike in energy prices caused by the war in Iran. But food and energy prices tend to be too volatile to inform the Fed’s decisions.
“That's why historically they've looked through headline inflation, that is, that include food and energy, to the core inflationary numbers,” said Andrew Clinton, head of Clinton Investment Management.
Core inflation last month was a lot closer to the Fed’s target rate of 2%, at 2.9% in the CPI. Fed officials might be tempted to think this spike in inflation is temporary. Except that’s what they did a couple years ago — and it didn’t work out.
“The Fed's error in 2021 was precisely this, was to assume that the supply shocks were temporary, transitory, in the word of the day, and they were caught flat-footed,” said Peter Conti-Brown, a professor of financial regulation at the University of Pennsylvania’s Wharton School.
Fed officials don’t want to make that mistake again. So, the bond market has started to indicate that it thinks the Fed will probably have to deal with inflation, said Derek Tang, an economist at the research firm MPA Macro.
“They do expect more of a chance the Fed might have to raise its policy interest rate sooner rather than later, and that's making some of these bond yields rise,” he said.
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