Markets Doubt Fed's Transitory Inflation View

Since Powell's August Jackson Hole speech, data indicates escalating price pressures, contradicting his checklist of limited broad pressures, moderating high-inflation items, low wage growth, and tepid inflation expectations. Consumer inflation expectations have surged to 5.3% for the next year and 4.2% for three years, record highs.

Markets are now pricing in earlier and more aggressive Fed rate hikes, with a first increase implied by September 2022. Analysts like Krishna Guha of Evercore ISI argue that broad-based pressures are evident, wage growth is rising (4.6% YOY), and market-based inflation expectations are increasing.

While structural forces may eventually temper inflation, the risk of a Fed policy misstep leading to an asset price bust is noted. Wall Street professionals and some Fed officials, including Atlanta Fed President Raphael Bostic, express growing concern, with Bostic preferring "episodic" over "transitory" to describe current price pressures.

The International Monetary Fund also warns of persistent inflation requiring central bank action.