. However, it appears that both Fed decision-makers and the broader markets believe any increase in inflation to be temporary and the chance of higher interest rates to be extremely low.derived from futures markets, puts the chance of the Fed raising rates this year at about 1 in 14. That is to say the market believes that the chance of the Fed raising rates in 2021 is extremely low.
The Fed’s own projections agree with that too. Policy makers estimate where they think Fed rates will be over the coming years. Only 1 of the 17 policy-makers who provide projections sees higher rates even by 2022. And in 2023, hawkish policy-makers are still in a minority, with only 4, or less than a quarter of them, seeing an increase even two and a half years out.
So this leads us to one of three basic outcomes. The first is that the spike we’re seeing in inflation is temporary. As such, the Fed can wait it out, without raising rates and, in a few months, inflation falls back to much closer to the Fed’s 2% target. The Cleveland Fed maintains a model that supports this view, suggesting 10-year inflation is likely remain under 2%.
Second is that the Fed is less worried about the ill effects of inflation. The Fed is on record as saying that they will tolerate some over-shooting of the inflation rate above 2%, because inflation has historically been under 2% for some time. This may mean that the Fed actually sees inflation at a higher level for longer, but is comfortable with that relative to other policy goals, such as low unemployment.
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