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How the Fed will respond to the coming inflation scare
Don t expect the Federal Reserve to tighten monetary policy in 2021- even if inflation comes in higher than central bankers are forecasting.
Tim Duy
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With a new fiscal package to support the US economy through the winter and the prospect of households unleashing substantial pent-up demand in 2021, the set up for faster inflation is better than it has been for decades.
But don t expect the Federal Reserve to tighten monetary policy next year in response - even if inflation comes in higher than central bankers are forecasting.
Don t expect Powell to be easily scared. He won t be.
© Greg Nash
The December Federal Open Market Committee statement didn’t break three legs to a duck (pardon my French). The only innovation came from the Fed introducing outcome-based qualitative forward guidance a fancy term to suggest the Fed will maintain its current asset purchases until “substantial progress” had been made toward the Fed maximum employment and inflation objectives.
But, while Federal Reserve Chairman Jerome Powell beckoned “strong” forward guidance and “powerful” policy support, he also inadvertently pointed to the Fed’s near-term policy limitations. The Fed is not out of policy ammunition, but the policy ammunition it carries is inadequate to deal with any further weakening of economic activity.
Powell worries US small businesses may not withstand final stretch of pandemic damage
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