Is the FOMC ready to declare victory on inflation? - Wells Fargo

According to analysts from Wells Fargo, the Fed’s efforts to normalize monetary policy appear firmly underway.

Key quotes:

"Not only has the FOMC been able to get multiple rate hikes under its belt, but the plans to reduce the Fed’s balance sheet are also taking shape. Policy tightening has followed marked improvement in the labor market. There is widespread agreement among the FOMC’s members that the committee has met the employment side of its mandate. According to the latest FOMC minutes, “nearly all” committee members see the economy “at or near maximum employment.”

"At the same time, there remains disagreement about whether the committee’s second mandate of price stability has been met. Inflation as measured by the PCE deflator rose to 2.1 percent in February, reaching the Fed’s target for the first time in nearly five years. Core inflation, however, remains below 2 percent and has been slow to move up over the past year (Figure 1). The persistent shortfall in the core index has left some members relatively cautious about tightening policy further, whereas others view the Fed’s inflation goal as effectively met and a risk that would warrant a faster pace of tightening."

"How inflation unfolds in the coming months will therefore have an important bearing on the path of Fed policy. Our own view is that both headline and core inflation will drift higher over the coming quarters, even as expectations for the timing and magnitude of fiscal stimulus have been dialed back. Further advancement toward the Fed’s target will be slow but sufficient for the FOMC to proceed in removing accommodation without having to ratchet up the pace of tightening."