As inflation measured by CPI and PPI clearly indicates the return to Fed’s goal, the FOMC is expected to cut benchmark interest rate starting in September. A 25-basis points reduction would balance the need of monetary ease and the continuation of policy stances.
To compensate the urgency of rate reduction due to economic slowdown, a quarter reduction will not likely comfort the market and many economists so the FOMC will likely reintroduce its communication tool by confirming a monetary ease path in the next few meetings and when its members making public speeches, and stating that the Fed has ample tools and will act to tackle economic slowdown if further materialize.
Similar to the abandon of inflation “transitory”, FOMC could explicitly abandon the term of staying “higher for longer”. In both cases the FOMC has mischaracterized the nature of inflation dynamics that reverberated the US and some advanced economies post COVID-19.