The Fed's cautiousness may continue until 2022.

The Fed has been raising rates to control inflation since its meeting in March. Softer inflation may not be enough to stop this until 2022 ends, because the Fed is being cautious.

WASHINGTON, DC - JUNE 19: Federal Reserve Board Chairman Jerome Powell is expected to announce a ... [+] 50bps to 75bps rate increase on September 21 according to market futures. (Photo by Mark Wilson/Getty Images)Getty Images
The Federal Reserve is expected to announce a rate increase of 50bps to 75bps on September 21, according to market futures. This would be the first rate increase since June 2019, and it would be a welcome move by the Fed to help support the economy.

The Fed's aggressive rate hikes since March have been effective in curbing inflationary pressures. However, with inflation still remaining elevated, further rate increases are likely in order. markets currently expect the Fed to hike rates by 75bps at its next meeting on September 21.

The Fed's hikes may seem out of step with recent inflation data, which has declined significantly since July. However, the Fed is looking past the swings in energy prices and is still concerned about underlying trends, such as in food prices, which continue to rise.

Inflation looks encouraging, according to new data.

While inflation remains a concern for many Americans, the current picture is somewhat encouraging. Energy prices, which were a major factor in rising prices, have fallen in price over recent months. Given that energy can have such large swings in price compared to other goods and services, movements in energy prices can be enough to drive the tone of the overall inflation report.

There are also signals that house prices are starting to decline, which is good news for home buyers. Some of the products which contributed to the inflation surge, such as used car pricing or elevated freight costs, are now going firmly into reverse, driving prices down rather than up. Plus, a very strong dollar is driving down import costs across the board, which is helping to keep inflation in check.

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The Fed's challenge is to ensure that inflation falls to its target level of 2%, rather than simply allowing it to fluctuate. This requires a delicate balancing act, as the Fed must be careful not to cause a sharp drop in inflation that could lead to economic instability.

Inflation may be falling, but it's still not low enough to justify the Federal Reserve's current course of action. If inflation were to fall to 4%, the Fed would still have a significant problem on its hands. That's why inflation falling is not enough and why the Fed is still on course to hike rates for now.

I believe that the Fed needs to be confident in our economy in order to get back to the 2% inflation rate. This was Powell's key point in his Jackson Hole speech in August of 2022. I think that if the Fed can continue to be confident in our economy, we will be able to get back to the 2% inflation rate and excess inflation will not persist.

What Could Change the Feds' Plans?

The market is expecting the Fed to start scaling back its aggressive monetary policy approach as we move into 2022. Futures markets are currently pricing in a 75bps interest rate hike in September, followed by another 50bps hike in November and a final 25bps hike in December. While there remains some uncertainty around the timing and extent of these rate hikes, it appears that the Fed will have more of the data it needs to make a change in emphasis relatively soon.

It is clear that the markets believe that the Fed will have the data it needs to justify a rate reduction in the near future. However, it is also clear that the data isn't quite there yet. Nonetheless, the markets are confident that the Fed will eventually have the data it needs to justify a rate reduction.

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The Fed's decision to raise rates in a very hot jobs market is a balancing act between managing inflation and growing the economy. The Fed is currently trying to keep both in mind when setting rates.

The strong jobs market is giving the Fed comfort that it has room to raise interest rates. If that changes, the trade-off between controlling inflation and spurring economic growth becomes trickier for Fed policy-makers.

The Federal Reserve is being cautious with interest rates.

The Fed's cautious approach to inflation is understandable, given the recent surge in prices. However, markets believe that the Fed will continue to raise rates in 2022, even as inflation begins to ease. Ultimately, it will be up to the Fed to determine whether or not inflation is on track to reach its 2% target. While a recession is always a possibility, hopefully the Fed will have the data it needs to make the right decision.