BlackRock Investment Institute

Macro insights

Fed meets inflation mandate

The powerful economic restart has driven U.S. inflation to its highest rate since the early 1990s. Core PCE inflation, the Fed’s preferred gauge, now stands at 4.1% year on year.

Under its new framework, the Fed targets average inflation of 2% - meaning overshoots are needed to make up for past undershoots. The Fed has not explained over which time horizon it calculates the average inflation rate, but average inflation is now at 2.19% over a five-year look-back window, as shown in the chart. It is even higher on shorter time horizons. The Fed has clearly met its inflation mandate.

Inflation lookback

Chart showing US average inflation at 2.2% over a five-year look-back window

Sources: BlackRock Investment Institute, U.S. Bureau of Economic Analysis, with data from Haver Analytics, November 2021. Note: The chart shows the average annualized month-on-month U.S. core PCE inflation rate over a backward-looking window of five years.

Is this not enough to start hiking rates? Not really. The decision also depends on meeting the Fed’s less well-defined full employment mandate. As a result, the key question for rates in 2022 is how the Fed will interpret “broad-based and inclusive” maximum employment, particularly as we expect inflation momentum to carry over into next year.

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Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

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