May 28, 2017

MEANING RATES ARE ALREADY USURIOUS:

The Fed's lowflation dilemma (Gavyn Davies, 5/28/17, Financial Times)

The last two monthly releases for consumer price inflation have been much weaker than anyone expected. Although the FOMC was fairly dismissive of the first of these announcements - saying in the minutes of its May meeting that it was probably caused by temporary or idiosynchratic factors - it is not yet known whether they have continued to ignore the second set of weak CPI data in April. The two months together have left core CPI inflation 0.4 percentage points lower than expected.

When the PCE deflator is released next Tuesday, it will probably show the 12-month core inflation rate at 1.5 per cent in April, the lowest figure since the end of 2015. The FOMC's reaction to this incoming news will depend on their reading of the underlying causes of low inflation, which are highly uncertain. But the markets have already decided that they will take the evidence seriously enough to abort their programme of rate rises after the planned June increase.

It may seem surprising that such a small amount of new evidence could cause a rethink of a monetary normalisation strategy that has been so long in the making. But the Fed's decisions are supposed to be data dependent, and the latest inflation readings have not supported their prior set of beliefs.


Posted by at May 28, 2017 7:53 AM

  

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