January is always a high-variance month for inflation readings and especially so for this January. We have been flagging the dynamics that were likely to grease the runway to elevated inflation prints in Q4 [https://www.employamerica.org/blog/what-will-hot-q4-inflation-tell-us-about-2022-dynamics/] (which mostly...
Conventional wisdom has held that rate hikes slow inflation long enough that straightforward accounts of how exactly one turns into the other are hard to find. Today, everyone needs to be on the same page about how exactly it is that Fed policy in particular can slow inflation.
It is key for commentators and policymakers to bear in mind that "transitory vs. persistent" is not the same debate as "narrow vs. broad-based."
If the Fed wants to stay true to the "maximum employment" component of its forward guidance, and the "broad and inclusive" nature of that goal, it is imperative that their interest rate policy actions reflect a full recovery on both of these measures.
The policy mistake worth worrying about isn’t the speed of taper per se; it's the signal that taper sends about the timing of liftoff in interest rate policy.
