The Fed might disregard inflation
There was a revealing moment in Clarida's comments yesterday that didn't get the attention it deserves.
He was asked about inflation and he responded by saying that because he expected it to rise due to transitory factors, he would be placing more emphasis on employment metrics in the coming months.
When most people see +4.2% y/y CPI, they see a problem, but the Fed is increasingly inclined to see noise. It's not just a matter of stripping out certain components and finding an underlying number.
They don't believe economic data shows a true picture of the underlying economy. They know there's spare capacity in every industry that will come back on after the pandemic and that there are 10 million US workers who could be brought back into the labor force after schools and daycares are fully reopened, cases fall to negligible levels and unemployment benefits run off.
Clarida offer the token warnings on inflation but the comment reveals that he doesn't really believe any of it. He wants to see what the economy will look like when at least 4 million jobs return.
What his comments mean is that inflation readings don't matter to him, only employment. I strongly suspect he's not the only one at the Fed who feels that way.
