The Fed hangs loose

Today's FOMC announcement has been one of the most widely anticipated in some time, given the emerging fears of inflation that have been steadily pushing Treasury bond yields higher in recent weeks. As expected, the FOMC statement left both the Fed funds target and the monthly pace of QE bond purchases unchanged for now.  The wording of the statement strongly suggests that the Fed sees no likelihood of that changing any time soon.  It appears that the decision was unanimous. 

The lengthy and slightly tortuous main paragraph of the release sums up the Fed's approach in light of its policy mandate:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. 

Those of us who have lived through major inflation spikes in decades past may feel slightly queasy about this.  Markets are already displaying jitters over the mere hint of inflationary pressures. If CPI is allowed to stay above 2 percent for some time, as the FOMC baldly state here, how long will bond investors tolerate that outcome before they conclude that the Fed is losing control of the situation? It may not be as long as the Fed would like. 

Also somewhat concerning is this statement of the factors the Fed will focus ob in the months ahead.

The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Missing from that list is any mention of fiscal policy. Of course the Fed can hardly be expected to cast direct doubt on the wisdom of President Biden's hard-won $1.9 trillion stimulus package. However, given the evidence, in the jobs market and elsewhere, that the US economy is well on the road to recovery, that package may well be adding more fiscal stimulus than the economy needs -- and there is the promise of an equally large infrastructure package still to come. It may not be too long before the Fed starts to feel pressure to lean against some of that fiscal stimulus, something that never ends well.