Upside risks to inflation are back on the Fed's agenda
The Fed expects inflation will take longer to return to target, with upside risks reflecting recent firmer inflation and Trump policies.
With the Fed signalling that it will likely cut rates at a much slower pace as core inflation takes longer to return to the 2% target, there has been a marked shift in how FOMC members perceive the balance of risks around the outlook based on diffusion indices calculated using subjective policy-maker assessments.*
Importantly, nearly all of the FOMC now thinks that the risks around core inflation are to the upside, up from near balance in Q3 and almost matching the extreme concern reached when inflation was surging in 2021-22.
This likely reflects not just recent firmer inflation, but also an initial assessment of the inflationary impact of Trump policies, where Fed Chair Powell said yesterday that, “some [policy-makers] did take a very preliminary step and start to incorporate, you know, highly-conditional estimates of [the] economic effects of [Trump] policies into [their thinking] and said so in the [monetary policy] meeting, [while] some people said they didn't do so and some people didn't say whether they did or not”.
As for the labour market, many committee members are still worried about the upside risk to unemployment, but much less so than in Q3 and where policy-makers nearly always worry about higher unemployment.
Finally, the committee still sees only a slight downside risk to the outlook for economic growth, although this should be treated as relative optimism in that policy-makers nearly always see a large downside risk to GDP growth.
Note:
* Diffusion index = no. of participants who said risks are “weighted to the upside” minus the no. who said “weighted to the downside,” divided by the total no. of participants.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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