If ever there were ever a case of the Emperor's new clothes, it was the Federal Reserve's (the "Fed") insistence for most of 2020 and 2021 that inflation was not a cause for concern. As late as November 2021, the Federal Open Market Committee's ("FOMC") official statement was still using "transitory" and sticking with the narrative that longer-term inflation expectations remained well anchored at 2 percent. After a stunning 9.6% year-over-year ("YoY") increase for the Producer Price Index ("PPI") and 6.8% YoY increase for the Consumer Price Index ("CPI") for November, the Fed admitted what the entire world knew: inflation was not transitory, a target inflation of 2% was so far in the past, one would need the soon to be decommissioned Hubble telescope to detect it and consumers were acutely feeling the pain of higher prices. The last time inflation was rising and at these levels was the 1970s, not exactly the regime any Fed governor would likely want to revisit.
The December FOMC statement, in addition to acknowledging inflation concerns, put forth further reductions in Treasury and mortgage-backed securities purchases. However, this marginally hawkish tone was accompanied by several caveats surrounding employment, general economic conditions and the continuing need to provide accommodative and supportive financial conditions. While some might consider this pivot as the harbinger of truly restrictive financial conditions, history might offer some guidance to potentially temper this perspective.