Core PCE Inflation* Versus The Fed’s 2% Target

The minutes from Chair Kevin Warsh’s debut Federal Open Market Committee (FOMC) meeting, released this week, showed that most participants thought a rate hike would be warranted if inflation remained above target and the labor market solidified. An important factor fueling policymakers’ concerns is that core inflation has exceeded the Fed’s 2% target for over five years, following a decade of inflation running mostly below target. Most policymakers are worried that “after several years of inflation above 2%, continued elevated inflation rates could begin to affect inflation expectations and wage- and price-setting decisions.” Indeed, if inflation doesn’t start making progress toward 2% soon, households and markets might lose confidence in the Fed’s ability to deliver price stability over any useful time frame. This would de-anchor inflation expectations and trigger second- and third-round inflationary effects as workers demand higher wages to compensate. While most policymakers are comfortable staying on hold for now, their patience is wearing thin.

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