Fed adopts cavalier attitude to inflation rebound

The downward revision to the Fed’s interest rate projections at the March FOMC meeting, despite little change in the economic projections, has prompted plenty of speculation that its “reaction function” has shifted. We’re sceptical that the Fed is now more willing to let inflation run above target than before, however. Instead, we think the majority of Fed officials simply don’t appreciate how quickly inflation will rebound in the second half of this year. The decline in the dollar and the continued rebound in commodity prices since the Fed’s meeting two weeks ago mean that rebound in inflation will only be bigger than even we previously expected.