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The Federal Reserve has retired the word “transitory," but it is pretty clear that this is still the Fed's view of inflation. The median projection of Fed officials for next year has the Fed's overnight borrowing target rising to 0.9 percent, which would mean the Fed would be targeting a range of 0.75 percent to one percent. That's three quarter-point rate hikes, a hike every four months or every other Fed meeting. The median projection for Personal Consumption Expenditure (PCE) inflation at the end of next year is 2.6 percent and 2.3 percent core PCE inflation.

We pointed out that this is a very aggressively optimistic combination of projections. It seems unlikely that inflation will be cut in half by a total of three quarter-point hikes over the course of the year. What's more likely is that the Fed will either have to live with more inflation than projected or hike more than it has signaled. Bank of America economist Ethan Harris summed it up nicely: "We are skeptical about their inflation forecast. We think they have not penciled in enough rate hikes. And we think even our forecast may be a bit too bullish. So enjoy the porridge while it is warm." By porridge, he means gains in equities. The stock market is likely to do quite well while the Fed plays catch up and rates remain lower than they would have had the Fed taken a more realistic approach.

One reason inflation is unlikely to fall by much is that even in the Fed's own projections, real interest rates (i.e. interest rates after inflation) will remain deeply negative. In the Fed's projections, for example, the real overnight interest rate at the end of next year is negative 1.7 percent. That is an extremely accommodative monetary policy. But you don't have to take our word for it. In the Fed's long-range projections, inflation runs at two percent and the Fed funds rate is 2.5 percent. In other words, the Fed thinks that the normal rate that would be consistent with maximum employment and stable prices is a positive 0.5 percent. Yet somehow it is going to tame Bidenflation with a negative 1.7 rate.

Jay Powell is not dumb, and he is advised by some very intelligent people. So we suspect that the Fed understands that its projections do not quite add up. But Fed officials want to avoid shocking markets by quickly transitioning to being actually as hawkish as they will need to be to bring inflation down to tolerable levels. So next year what we will likely see is the Fed walking its interest rate projections up and hiking faster than it has signaled. Don't be surprised if the Fed hikes six times next year instead of the three it signaled this week.

– Alex Marlow & John Carney
Breitbart News Network