Predictions of four Federal Reserve interest-rate hikes this year are on the rise. But the central bank has two questions to answer before it decides to act more aggressively than planned: How much preemptive tightening is already in the pipeline, and how symmetric is the 2 percent inflation target?
It doesn’t take much imagination to tell a story of a more hawkish Fed. The economy finished 2017 with considerable momentum that seems to be carrying forward into 2018. Add to that an already low unemployment rate and a surprise inflation boost in January, and it’s easy to see why central bankers might panic and think they are falling behind the curve.
But are they really falling behind the curve? Remember these circumstances were long anticipated by central bankers.
In the fall of 2015, Fed Chair Janet Yellen presented a long speech explaining the inflation model and justifying the beginning of a rate-hike cycle, even though turmoil in financial markets during the previous summer eventually short-circuited the Fed’s plan after just one hike, in December 2015. The Fed was not able to return to rate increases until a year later.
Nonetheless, it did return, and central bankers continued tightening in 2017 despite inflation that was well below forecast.