The Federal Reserve’s recent aggressive rate signal has created uncertainty in markets and some investors wonder whether the central bank is paddling back on its promise to tolerate higher average inflation. But Talib Sheikh, Mark Richards and Matt Morgan argue that the Fed is effectively creating wiggle room to act if inflation proves to be sticky.

 

 

The Federal Reserve’s (Fed) June monetary policy review caught investors by surprise. The realisation that the central bank could raise interest rates sooner than earlier expected jolted the markets.

 

In the run up to the meeting, Fed officials repeatedly insisted that they expected the inflation indicators we were seeing would be “transitory”. Another reason for the turbulence is that the market had settled into a sense of comfort after the Flexible Average Inflation Targeting or “FAIT” framework was unveiled last year.

 

We’ve said many times the framework review heralded a significant shift in monetary policy for the Federal Reserve (see here and