The Federal Reserve is no longer willing to 'look through' one-time supply shocks causing inflation. After a prolonged period of high inflation from various sources (tariffs, war, AI demand), the FOMC signals it will act to prevent high inflation expectations from becoming permanent, regardless of the original cause.
A significant, yet overlooked, factor pushing inflation higher is demand related to Artificial Intelligence. This effect is amplified within key price indices like the PCE due to mismeasurement, contributing to the persistence of inflation figures staying closer to 3% rather than the Fed's 2% target.
While shrinking the Fed's balance sheet is effectively off the table, a significant internal debate focuses on its composition. The key question is whether the Fed should hold assets proportional to Treasury issuance or shift to mostly short-term bills to insulate its profits from political scrutiny.
Fears of a less transparent Fed may be overstated. The most probable change to communication is removing the official median projection from the Summary of Economic Projections (SEP). This is a minor tweak, not a withdrawal of forward guidance, as markets would calculate the median anyway.