The Federal Reserve has raised its forecast for its preferred inflation measure to top 3% this year, a revision that has market watchers performing their usual ritual of feigned surprise at what the data has been telegraphing for months.
Inflation predictions, as any market veteran will tell you, tend to follow the path of least resistance. They drift with prevailing sentiments until reality forces an adjustment—which is precisely what we're seeing now.
I've been tracking these Fed projections since before the pandemic, and there's always this peculiar gap between what the numbers clearly show and what policymakers are willing to officially acknowledge. This latest revision simply bridges that gap a little more.
"The data has been there for anyone willing to look," said one economist I spoke with last week, who preferred not to be named so he could speak candidly. "Services inflation isn't behaving the way the models predicted, but nobody wanted to be the first to say it."
What's particularly fascinating is watching the delicate dance between the Fed and market expectations. Powell and company need to project vigilance without sparking panic, while traders are desperately trying to position themselves for whatever comes next.
Look, we've seen this movie before. The Fed sets a target, misses it consistently, then gradually shifts its forecasts to match reality—all while insisting the original target remains THE target. It's monetary policy theater at its finest.
Remember January? Markets had priced in seven rate cuts for 2024. Seven! That forecast now seems about as realistic as my plans to finally organize my garage this weekend.
The thing about inflation (especially the services component) is that it's remarkably stubborn. Housing costs, healthcare, insurance—these don't respond to interest rate changes with the immediacy of, say, mortgage applications or stock prices. They linger. They persist.
We're essentially watching two competing inflation narratives battle for supremacy.
In one corner: the cyclical view. Inflation spiked due to pandemic disruptions and stimulus, and will naturally return to target as those factors fade.
In the other: the structural view. Demographic shifts, deglobalization, climate adaptation costs, and persistent government deficits have fundamentally altered the inflation landscape.
The Fed remains institutionally wedded to the first view, while being forced to acknowledge elements of the second. It's a tough spot.
Treasury yields jumped on the news, naturally. The 2-year yield in particular has been bouncing around like a kid who found the office coffee pot, reflecting the market's constant reassessment of where rates might land.
(The irony isn't lost on those of us who covered the Fed during the 2010s when policymakers couldn't generate enough inflation to hit their targets. Be careful what you wish for, indeed.)
So where does this leave us? Probably with fewer rate cuts than markets had hoped for back in the heady days of January... but still likely to see some easing this year. Just later. And less dramatic.
For investors, the implications are—well, complicated. Higher-for-longer rates suggest caution on duration and growth stocks, but the Fed's apparent willingness to tolerate above-target inflation might actually support nominal assets.
Having watched these inflation cycles for years, I'd suggest one thing remains constant: the Fed will always claim to be "data dependent" while the markets will always race ahead to predict what that data might be.
And the rest of us? We'll continue pretending to be shocked when the obvious finally becomes official.
