Rising energy prices, higher wages, and surging Owner's Equivalent Rent values should keep CPI well above the Fed's 2% target throughout most of 2022. But despite this organic slowing of the economy, inflation will be much more reluctant to become tractable. And, when you factor in the inventory build, which added 4.9 percentage points to the GDP figure in Q4, you get a slowdown this year that will be profound. Hence, what you have in reality is a massive fiscal and monetary drag that is already set to drive GDP growth towards the flat line. Nevertheless, the FOMC fails to grasp the rapid growth and inflation was engendered by unprecedented fiscal and monetary stimulus, which has now gone in reverse.
Add in the 7% CPI print for December, and you have a Fed that now understands it is far behind the inflation curve and it's time to pivot towards an even tighter monetary policy stance. This is a big problem for the Fed, since it falsely believes inflation comes from an economy that is growing too fast. The Bureau of Economic Analysis reported Q4 2021 GDP growth at a 6.9% SAAR. In either case, Jerome Powell received more reasons to become hawkish just one day following his already hawkish FOMC press conference. Or, perhaps more accurately, he is most swayed by the performance of the stock market. Maybe he is just too dependent on the prevailing winds of the current economic data. The current Fed Chair is perhaps best known for his quick pivots from hawkish back to dovish and vice versa.
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