Is the Fed getting nervous?

The tone of the statements issued after the US Fed's FOMC meetings has been rather odd in recent months. Instead of providing a detailed analysis of the current economic situation and the near-term outlook, the FOMC has chosen mainly to restate the general principles underlying its policy approach.  The statement after the July 28 FOMC meeting is a further example of this, right from the very first paragraph: 

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

Sure, this is followed by a brief but detail-free paragraph on the growth outlook, but the really striking thing about the whole document is the treatment of the elephant in the room: the recent surge in inflation to more than 5 percent. There's a whole long paragraph on the Fed's wish to see inflation stabilize at the long-established 2 percent target, but the surge to a way higher level is virtually dismissed in one short sentence:

Inflation has risen, largely reflecting transitory factors.

The press conference after the statement was released suggests that the Fed may not be as confident about the "transitory" part as the statement implies.  Chair Jerome Powell's comment about the inflation picture is ever so slightly evasive:

“Inflation is running well above our 2% objective, and has been for a few months, and is expected to run certainly above our objective for a few months before we believe it’ll move back down toward our objective. The question of whether we’ve met that objective, formally, is really one for the committee to make,” Powell said.

So the FOMC gets to set the exam, take the exam and then decide whether it has passed the exam? Powell certainly does not want the markets to make that decision for the Fed: if that were to happen, the supposedly "well-anchored" expectation of 2 percent inflation might quickly evaporate. There can be little doubt that the rise in inflation has been hotter and more prolonged than the Fed expected, and Powell is now admitting that it may persist much longer than the term "transitory" initially seemed to suggest. 

This all suggests that the Fed's accommodative approach is riskier now than it has been at any time since the pandemic began. To no-one's surprise, the FOMC left the funds target unchanged this week, but markets are looking for tightening to come some time in 2022.  There is the faintest of hints in the wording of the statement that the Fed is thinking about how and when it might be advisable to "taper" its quantitative easing program, but for now those asset purchases will continue. If the Fed is wrong about the inflation outlook, things could get interesting, and not in a good way.