By Jamie McGeever
ORLANDO, Florida, Sept 9 (Reuters) — The Federal Reserve is widely expected to cut interest rates next week even though inflation is still around 3 percent, a full percentage point above the official goal. This raises an uncomfortable question: is the central bank’s 2 percent inflation target still viable?
Data on Thursday is expected to show that annual core CPI inflation held steady in August at 3.1 percent. Annual core PCE inflation, the Fed’s preferred measure, was 2.9 percent in July.
Easing policy with inflation at this level would be a rare step.
Of course, the Fed cut rates late last year when core CPI was even higher at around 3.3 percent, though that move drew fire because unemployment didn’t rise as Fed officials had warned and long-dated yields rose.
If you want to find the last time before this cycle that the central bank eased policy with core PCE inflation at 3 percent, you have to go all the way back to the early 1990s, before the Fed unofficially adopted its 2 percent target.
That’s a long time ago, when the economy was in a very different place. The internet as we know it barely existed, there were no smartphones, and ‘apps’ was the abbreviation for ‘appearances’ in soccer players’ stats.
So the prospect of the Fed easing policy for the second time in a year with core inflation at 3 percent is a big deal – and may be yet another sign that the economic orthodoxy of recent decades is being tested or trashed. Take your pick.
UNORTHODOX
Inflation hawks fear it’s the latter. The federal government’s debt and deficit are at record levels for non-crisis, peacetime, and there are fears that long bond yields could start climbing again.
But markets don’t seem too worried.
To be sure, inflation fears are reflected in some asset prices, not least gold, which is up nearly 40 percent this year, printing record highs on a near daily basis.
But look around, and it’s difficult to argue that financial markets are overly worried about the potential loosening of the Fed’s 2 percent target.
Indeed, the 2s/30s yield curve may have steepened around 70 basis points this year to a four-year high of 134 bps last week, but the 30-year yield is actually down slightly this year. – Reuters
