🏦Fed Rocks The USD Boat: Westpac

• The Fed’s inflation projections confidently reveal ongoing faith in the “transitory” outlook. Following a spike to 3% by end-2021, the median core PCE projection shows an expectation that it will settle back toward 2% in 2022 and 2023.

• But that masks a considerable shift in the perceived risks. At each quarterly forecasting round, FOMC members assess the risks to their growth, unemployment and PCE projections – to the upside, downside or broadly balanced.

• Back in March 2021, just 5 of 18 members assessed that the risks to core PCE inflation were weighted to the upside. A solid majority - 12 of 18 - assessed core PCE risks to be broadly balanced in March.

• But by June, that assessment swung decisively, with 13 FOMC members among 18 assessing that core PCE inflation risks have shifted to the upside. As shown in slide one, the net balance of perceived core inflation risks among FOMC members is the highest in the history of their projections, by a comfortable margin.

• In so far as the Fed’s projections and perceived risks to their projections drive the dots, we can conclude that a material shift on the inflation side of the Fed’s mandate was a key catalyst for the shift in their hitherto resolutely dovish stance.