FOMC's Inflation Concerns Raise Doubts On Its Reaction Function

One concern raised by sell-side analysts is the FOMC's newfound worry about upside inflation risks as suggested by the communications from the June meeting.

• Not only did Powell mention multiple times that the Fed might be wrong about how quickly "transitory" inflation readings might fade, we note that in the 'balance of risks' to inflation portion of the SEP release, there was a major shift for core PCE inflation forecasts toward "weighted to upside" selected by 13 of 18 members vs just 5 in March (see chart).
• This was broadly seen in the 28 sell-side notes we read for our Fed Review as suggesting that many on the FOMC are concerned that the strong April/May inflation prints may prove to be signals of more than just "transitory" price pressures. Powell also noted upside risks.
• Some analysts expressed concern that this calls not just the Fed's outlook on transitory inflation into question, but also the Fed's willingness to adhere to its new framework (including flexible average inflation targeting with overshoots) as it weighs the uncertainty of rising inflation and the risk of falling behind the curve.

Source: June 2021 FOMC SEP