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The Federal Reserve has abandoned its “inflation is transitory” stance and says inflation is “persistent.” Stocks lost 2% from last week’s all-time closing high.

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The change in Fed policy is illustrated in this chart by Fritz Meyer, an independent economist. The Fed had been predicting inflation would peak at 4.1%. But its inflation benchmark, the Personal Consumption Expenditure Deflator, shot past 4.1% to 5% in October. 

On Wednesday, at a press conference, the Fed chief admitted inflation has been more persistent than expected and said the Fed now expects inflation to peak at between 5.3% and 5.4%, shown in the dotted gray lines in the chart above. The peak will occur in the first quarter of 2022, according to the Fed forecast, and then collapse to 3% or less in the second quarter of 2022. 

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The Standard & Poor’s 500 stock index closed Friday at 4,620.64. The index lost -1% from Thursday and -2% from last week, when it closed at an all-time high. The index is up +69.5% from the March 23, 2020, bear market low.