Thread by @jasonfurman

FOMC comes in largely as expected following the much welcome Powell pivot. The dots now set the default of three hikes next year--which is both the likely policy and also reduces the risk of surprising markets. We'll see how Chair Powell sounds in the presser.

I still find it unfathomable that as recently as 2 months ago the median FOMC member forecast core PCE inflation of 3.7% for the year. They already had price data for the first eight months of the year when they made that forecast. Now they're at 4.4%.

https://twitter.com/jasonfurman/status/1440743624094806019?s=20

Also a pretty large increased in the forecast for inflation in 2022, now is 2.7%. I would still take the over on that but with much less confidence than I've taken the over on their 2021 forecasts.

It's not just about inflation: they are also forecasting a more favorable unemployment rate for 2021-Q4 (no surprise there, we have most of the data) and also for 2022. This is another reason to move towards normalization.

It's not a surprise but still a disappointment that they are claiming they will not liftoff until we reach maximum employment. Why? Because their framework was about shortfalls from maximum employment not dichotomous. federalreserve.gov/monetarypolicy…

In particular, I could see the unemployment rate sustainably fall to 3.5% or even 3.0% (with commensurate increases in EPOP). I don't want to give up on maximum employment wherever we are in mid-2022. Moreover deviations matter and we're far from the inflation goal.

Moreover, you should want rates roughly neutral when you're at your goal. Not start raising them when you get to your goal (especially when you're far off on your other goal).

The good news is I think the Fed doesn't actually believe it's own statement. But less than ideal.

If inflation is more persistent than they think and UR keeps on falling I could see four rate hikes in 2022. That may even be what is needed (every other meeting starting in March), but three seems most likely and fine.

Overall, I like the Powell pivot.

P.S. Still a lot of uncertainty about omicron and future variants so the above may very well change. But better to have a reasonable default and then be prepared to deviate from it if needed.