Mind the (Fed credibility) gap

The Fed has blinked. The committee sees a need for higher rates sooner than Powell had hoped. But the Fed’s forward guidance and the gradualism this generates makes it difficult to redefine policy to the new realities of booming demand and quickening inflation. The absence of a debate about tapering is a case in point. Bonds see this, equity markets don’t yet. And while the knee-jerk response is a stronger dollar, heightened policy uncertainty and the risk of monetary policy error isn’t usually a currency’s friend.

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