Measures of underlying inflation have started to reaccelerate in recent months, and this is a problem for the Fed, see chart below.
The Fed cannot and will not turn dovish as long as inflation remains significantly above the FOMC’s 2% inflation target, particularly when underlying inflation is trending higher.
The consequences are that delinquency rates on credit cards and auto loans will continue to increase, corporate default rates will continue to move higher, and bank lending will continue to trend lower.
In other words, we are entering a period with weaker economic data where the Fed will stay on hold.
Source: FRB of Atlanta, FRB of Cleveland, Haver Analytics, Apollo Chief Economist
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