Not a rate-cut economy.
The inflation index that the Fed has anointed to be the yardstick for its inflation target – the PCE price index without the volatile food and energy components – rose 0.19% in May from April, according to the Bureau of Economic Analysis this morning. This increase in “core PCE” was near the top of the range since 2010. It followed the 0.25% jump in April, which had been the third largest increase since 2010:
Fed Chair Jerome Powell, at the press conference following the no-rate-hike FOMC meeting last week, gave a clear and succinct summary of the US economy. It was mostly in good shape, he said, in particular where it mattered the most: “All of the underlying fundamentals for the consumer-spending part of the economy, which is 70% of the economy, are quite solid,” he said.
He acknowledged that there were some problems, including the slowdown in manufacturing and the current bust in the vast US oil-and-gas sector, and that the Fed would be watching for further deterioration in the economy, before it would take action. But “low” inflation was another matter.
Sustained “low” consumer-price inflation – as the Fed defines it – worries the Fed, though it’s a godsent for consumers. If inflation, as measured by the core PCE price index, drops in a sustained manner below the Fed’s pain threshold, wherever that may be, the Fed would likely adjust monetary policy no matter what the economy does.
The Fed’s “symmetric” target is a 2% annual increase in the core PCE index, meaning the increase can fluctuate some above or below the target without causing the Fed to act.
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