The latest FOMC forecast predicts that core inflation within a year will fall below 3%. This has been the forecast for every Fed meeting over the past two years. And this forecast has been consistently wrong, see chart below.
Earlier this week, the Fed took the consequence of this systematic forecast error and turned significantly more hawkish. Markets didn’t listen, and the change in tone from the Fed ended up having little negative impact on rates, credit, or equities.
The bottom line is that inflation at 5% remains too high, and it is clear that markets are underappreciating the Fed’s commitment to get inflation back to 2%.
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