As the statement and updated projections from this week’s FOMC meeting made clear, a majority of Fed officials remain convinced that the recent weakness of core inflation is mostly due to transitory factors and still expect to hike rates again in December. That said, in her press conference Chair Janet Yellen sounded less confident and admitted that she couldn’t fully explain why inflation has been so subdued.
In our view, although there has been some more widespread weakness, one-off idiosyncratic factors have played the biggest role and, as those forces start to fade, we expect core inflation to rebound again early next year. With the labour market continuing to tighten and the possibility of a deficit-financed fiscal stimulus giving a temporary boost to demand, we think the Fed will follow a December rate hike with four more hikes in 2018.
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