It is becoming increasingly apparent that many Fed officials are underestimating the degree to which inflation will rise in the second half of the year. Fed officials expect core PCE inflation will fall back to 1.6% by the fourth quarter, but it remained at 1.7% in February. Our view is that, with domestic price pressures already rapidly building and the deflationary impact from the dollar’s past appreciation fading, core inflation will be close to 2% by the end of the year. Markets are already coming around to our view. Fed officials won’t be too far behind. We expect the fed funds target range to be between 2.25% and 2.50% by the end of next year, above the median Fed projection of between 1.75% and 2.00%.
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