Barron’s: Investors are calling the Federal Reserve’s bluff. “We don’t believe you,” the futures market is effectively telling the Fed

The Federal Open Market Committee’s latest policy communications raised more questions than answers. Perhaps the biggest one: Can the Fed ever really raise interest rates?

At face value, and with a big dose of relativity, this past week’s updated summary of economic projections and commentary from Chairman Jerome Powell marks a hawkish turn. Officials signaled rates could rise in 2023, earlier than previously telegraphed. And during his press conference, Powell acknowledged for the first time that inflation may turn out to be hotter and more persistent than the Fed has projected—no small change for a person who has pushed the idea of transitory inflation, says Tom Porcelli, chief U.S. economist at RBC Capital Markets.

But when you take a step back, the Fed remains about as dovish as ever. When the consumer-price index is running at 5%, it’s hardly hawkish to say there is a chance price acceleration is faster and lasts longer than anticipated. It already is, and it already has.

Powell, like past Fed chiefs, told investors to take the so-called dot plot of officials’ economic projections with a big grain of salt. But to the extent the dots are useful for reading the internal debate, they still show that only three members changed their view for raising rates in 2022, not enough to lift the median forecast from 0.125%. How hawkish can this all really be if, all told, the most skeptical members are thinking about raising rates by 0.5% in 2023? Moreover, the dots’ 2023 message runs counter to the Fed’s own updated economic forecasts. It still sees inflation hardly above 2% in 2022 and 2023, despite the new tolerance for above-target inflation, and it predicts a meaningful slowdown in growth after this year.


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