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.

Recent macro insights

Restart confusion
Recent central bank meetings show policymakers are having difficulty clarifying some of the confusion around their response to the powerful economic restart.
U.S. restart slowing but not over
The U.S. economy grew by an annualized 2% in the third quarter – slower than the 6.7% expansion in Q2 and somewhat below expectations.
Inflation expectations shrug off surge
The implication of near-term surging prices for longer-term inflation expectations is a key concern for central banks.
Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

Stay ahead of markets with the latest insights from the BlackRock Investment Institute.

Please try again
First Name *
Please enter a valid first name
Last Name *
Please enter a valid last name
Email *
Please enter a valid email
Investor type *
This field is mandatory
Country *
This field is mandatory
Company *
This field is mandatory
Thank you
Thank you for your subscription!
We usually publish weekly insights on every Monday. Expect to receive your first newsletter from us this upcoming Monday.