When measuring inflation, I’m most interested in understanding current and near-term forward inflation. Year-over-year inflation numbers look back over the last 12 months and are very lagging indicators and thus are less relevant in my mind when thinking about where asset markets might be going in the near future.
In his press conference after the September FOMC meeting, Powell gave some hints as to the FOMC’s current and forward view of inflation.
Powell said (p. 10, link below):
“And you see this I think in the Committee forecast, you want to be at a place where real rates are positive across the entire yield curve. And I think that would be the case if you look at the numbers that we’re writing down and think about, you measure those against some sort of forward-looking assessment of inflation, inflation expectations, I think you would see at that time, you’d see positive real rates across the, across the yield curve…”
This means, approximately, that the FOMC’s forward estimates of inflation should be less than their forward estimates of the Fed funds rate. At the end of 2022, the median Fed funds rate forecast from the FOMC committee is 4.4%. At the end of 2023, the median Fed funds rate forecast from the FOMC committee is 4.6%.
So, their estimate of inflation by the end of 2022 and 2023 is most likely below about 4.5% plus some spread (because many borrowers do not borrow at the Fed Funds rate, but borrow at some spread above that rate, such as typical corporate bond yields, or mortgage yields - of course the US Treasury might borrow near the Fed Funds rate and as a major borrower should be included when thinking about the borrower mix). But the Fed’s aim is for policy to be well into restrictive territory by the time rates reach the forecasted future Fed funds rates of about 4.5%, so ballparking forward inflation below 4.5% is probably not a terrible back-of-the-envelope estimate.
Further, Powell said (p. 7):
“…we’ve just moved I think probably into the very lowest level of what might be restrictive…”
I found this statement interesting for what it might reveal about the Fed’s estimate of current inflation.
The Fed is saying that they estimate that the current Fed funds rate (3%-3.25%) is at the edge of being restrictive and should begin to reduce inflation. Near the time of the FOMC meeting, the 2-year Treasury yield was about 4% and the 2-year investment grade corporate bond yield was about 5%. So, the Fed’s estimate of current inflation is most likely below the 4% to 5% range.