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Powell Says Fed Will Not Allow Large Overshoot on Inflation

Federal Reserve Chairman Jay Powell answered a letter from Senator Rick Scott (R-FL) outlining concerns about a potentially significant rise in inflation. His response gave some more contours to the Fed’s intentions around it’s mysterious Adjustable Inflation Target (AIT) framework. The Fed chairman usually avoids tying himself into any obligatory statements and tends to shy away from hard numbers but did seem to indicate some of the more extreme speculations about what the Fed could do around inflation in the media are hyperbolic. Powell by and large stuck closely to the script he has recited so well for months. However, he elaborated that he didn’t see a future where inflation substantially exceeds 2% for a prolonged period. He underscored that regardless of the new framework the Fed will always pursue its dual mandate.

Whoever leaked the Biden capital gains plan this week may have done Jay Powell a favor by proxy. Going into the upcoming Fed meeting, 1-year inflation expectations rose to 3.7%, which was the highest level in 9 years. This was up pretty significantly from 3.1% the prior month. Even the whiff of tax increases should help to assuage raising inflation expectations and make a ‘squeeze’ less likely. The real takeaway is that Powell moderated the comments of some of the ultra-dovish Fed members that have been raising the specter of allowing 3% inflation. This is accompanied by a flurry of other bullish activity across the economy.

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