Would The FED maintain tomorrow that (high) inflation is transitory? Would that affect Mr. Market?

Tomorrow is "FED day", understood as the day in which the US Federal Reserve announces the monetary policy decision after the 2-day meeting that began today.


As I wrote in this journal in September, the FED already mentioned in its monetary policy statement at the end of July that, to begin the reduction of its bond purchase program of USD80,000 million and USD40,000 million per month in Treasuries and MBS respectively (decrease process known as "tapering"), their inflation criterion had already been met and that they only needed to see advance in the employment one. At that meeting, the FED board observed the variation of the PCE Index in 12 months at 3.9% and the unemployment rate at 5.9%. Now the variation of the PCE index is 4.4% per year and the unemployment rate is 4.8% (as of September), and therefore, there is higher inflation than the one had already satisfied the FED and an unemployment rate substantially lower than the one they saw when they commented on these variables in July.



Evolution of the 12-month variation of the PCE Index in US (inflation seen by the FED). Last reading for September was 4.4%




Evolution of the unemployment rate in the United States (last 5 years). Last reading of 4.8% (September)



The last monetary policy meeting was on September 22nd and, from the minutes of that meeting, I highlight the following comments:


  • "Consumer price inflation in June and July—as measured by the 12-month percentage change in the personal consumption expenditures (PCE) price index—was elevated..."

  • "The staff interpreted recent inflation data as indicating that supply constraints were putting a larger amount of upward pressure on prices than previously anticipated; relative to the July projection, these supply constraints were also expected to take longer to resolve. As a result, the 12-month change in PCE prices was projected to hold roughly steady over the remainder of 2021 and to end the year well above 2 percent."

  • "The staff also continued to judge that the risks around the inflation projection were tilted to the upside, with the possibility of more severe and persistent supply issues viewed as especially salient. In addition, the staff pointed to a risk that longer-run inflation expectations would move appreciably higher and lead to persistently elevated inflation."

  • "Participants reaffirmed that the Committee’s “substantial further progress” standard regarding its asset purchases was distinct from the criteria given in its forward guidance on the federal funds rate and that a policy shift toward a moderation of asset purchases provided no direct signal about its interest rate policy"


Considering the aforementioned, on the "roughly steady" 12m change in the PCE price index over the remainder of the year expected by the FED in its previous meeting, Powell faces a new Committee with a variation greater than the one