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Taper Talk Has Arrived, Rates Remain Subdued

The continued prevalence of high inflation numbers has the Fed in a bit of an awkward position, and on the periphery of the FOMC rumblings have begun about tapering. It appears the long foretold ‘thinking about, thinking about’ tapering has finally begun. However, the core position of the Fed and actions so far remain in the accommodative stance and likely will for the immediate future. There is definitely a tidal shift in the discourse though and the Fed appears to know it.

The headline inflation number that came in hot a few weeks ago was headline grabbing but it also had several characteristics under the hood that allowed the Fed to credibly dismiss the alarm bell some Fed skeptics and former candidates for Fed chair have been raising. That number is also not one the Fed uses for its purposes. However, the indicator that the Fed considers the best indicator with regards to measuring inflation has just risen at a faster than expected pace of 3.1%. Now, this is still within the bounds of the AIT framework and the core of the FOMC is standing strong, but this is a significant development that this indicator is also coming hot, although much less so than the other number. The expectation was for a reading of 2.9%.

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