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Markets Might Hafta Grapple with “Patient”: Fed Rate Cut in July After This Inflation?

Markets Might Hafta Grapple with “Patient”: Fed Rate Cut in July After This Inflation?

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.

 …click on the above link to read the rest of the article…

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