The Fed's Playbook is Already Out For Next Week And Rates Have Already Reacted

The first few months of 2022 have seen rates rise at the fastest pace since the 1980s as a confluence of known issues collided with unexpected volatility due to the war in Ukraine.   Known issues were actually fairly straightforward before Ukraine.  Issue 1: The Fed’s New Inflation Framework In August 2020, the Fed announced a long-awaited change to its inflation fighting strategy.   Applying lessons from the past decade of monetary policy, the Fed concluded that the economic recovery would have been better for a wider group of Americans if inflation had been allowed to run a bit hotter for a bit longer.  The newly announced framework meant the Fed would be waiting longer to hike rates the next time it was faced with that decision–something that was incidentally quite relevant considering it had just cut rates to record lows (0-0.25%) at the onset of the pandemic.  Along with the big rate cut, the Fed was also buying mortgage debt and Treasuries at the fastest pace ever.  This bond buying made low rates even lower. The inflation landscape in August 2020 suggested no end in sight for the Fed’s rate-friendly policies.  The line in the following chart would need to rise well above 2.5% for the Fed to even open a conversation on tapering bond purchases or hiking rates. In the months that followed, inflation actually declined as the more normal months from late 2019 and early 2020 fell off the year-over-year calculation.  But by the 2nd half of 2021, it would be an understatement to say that things were changing quickly.
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