BlackRock Investment Institute

Macro insights

New nominal still holds

Fed Chair Jerome Powell last week indicated that a taper announcement could come in early November, and that the taper itself could be complete by mid-2022. Yet he also stressed the higher bar for rate lift-off than for tapering.

It is clear the Fed does not yet see either its inflation or its employment goals as met – a prerequisite for lift-off – despite the fact that the Fed’s updated forecasts show inflation above the 2% target for the next three years. Average inflation with a 3-5 year lookback is also now above 2%. See the chart. Still, even though the Fed now forecasts more rate hikes in the future than it did in June, the pace is much slower than the historical average.

Inflation window

Chart showing average U.S. core PCE inflation now above 2%

Sources: BlackRock Investment Institute and Bureau of Economic Analysis, with data from Refinitiv Datastream, September 2021. The chart shows the average annualized month-on-month U.S.  core PCE inflation rate over a range of backward-looking windows, from three to five years long.

This underscores our new nominal theme – that central banks are responding in a more muted way to rising inflation than in the past. Further clarification will be needed from the Fed on what it will take to meet its inflation objective under its new flexible average inflation targeting framework –but so far Chair Powell seems keen to use its flexibility to argue a more dovish case.

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Elga Bartsch
Head of Macro Research
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Nicholas Fawcett
Macro Research

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