Monday, September 23, 2013

The Fed’s Inflation Target (excerpt)

The Fed’s inflation target (using the core personal consumption deflator) has been 2% for quite some time. It’s been below that rate since May 2012. At last week’s press conference, Fed Chairman Ben Bernanke said that the FOMC is considering setting an inflation floor. If inflation falls to or below this lower bound, then the federal funds rate won’t be raised even if the unemployment rate continues to decline. He added, “I mean, that we should be very reluctant to raise rates if inflation remains persistently below target and that's one of the reasons that I think we can be very patient in raising the federal funds rates since we have not seen any inflation pressure.”

It’s not obvious to me why Fed officials want to boost inflation. The recent decline in inflation has been led by such goods as airfares, used cars, and furniture and bedding. The biggest plunge has been in medical care commodities inflation. Medical services inflation has also been falling. On the other hand, tenant rent inflation rose during August to 3.0% y/y, the highest since May 2009.

Why would it be good for the economy to have rents rise faster? Do Fed officials really want medical care inflation to rebound? These are questions that the Fed chairman did not address in his press conference.

Today's Morning Briefing: Taper Caper. (1) Leaves will change before Fed does. (2) Fed officials concerned about weaker economy and fiscal follies. (3) Also, tapering postponed so yields would stop rising as a result of tapering talk. (4) Bond yield may stay between 2.5%-3.0% for a while. (5) Gold goes up and down. Industrial commodity prices barely budge. (6) Emerging markets unlikely to outperform. (7) Europe may not continue to outperform unless data improve. (8) US stocks face some challenges in October. (9) Bernanke’s last two press conferences confuse rather than enlighten. (10) “Prisoners” (+). (More for subscribers.)

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