E Suppose You Were A Fly On The Wall At An FOMC Meeting

Let us suppose that you are a fly on the wall at the September FOMC meeting. Here is a representative sample of the information you would have heard regarding the key factors affecting inflation. If you were faced with these data would you support a continuation of rate hikes?

Featured in the FOMC minutes are the following comments:

  • Total consumer price inflation, as measured by the 12-month change in the price index for personal consumption expenditures (PCE), continued to run below 2 percent in July and was lower than at the start of the year. That real PCE was likely increasing at a slower rate in the third quarter than in the second quarter;

  • Compensation per hour rose just 1-1/4 percent over the four quarters ending in the second quarter of 2017

  • Nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE declined in August and were revised down in June and July;

  • Real residential investment spending was decreasing in the third quarter after declining in the second quarter. Starts for new single-family homes edged down, on net, in July and August, and starts for multifamily units moved lower in both months.

  • The median expectation for PCE price inflation over the next 10 years from the Survey of Professional Forecasters edged down .

  • Half of the decline in the 10-year Treasury yield  { is due to } to a decrease in the average expected future short-term rate and the remaining half to a lower term premium; and,.

  • Other advanced economies were also experiencing low inflation, which might suggest that common global factors could be contributing to persistence of below-target inflation in the United States and abroad.

Maybe I cherry-picked these quotations from the FOMC minutes and another writer will likely find quotations supporting the prospects for a rise in the inflation rate. But my choices are very representative of state of the US economy. The data raise more questions about the raison d’etre behind the Fed’s insistence that further rate hikes are needed to ward off inflation.  The Fed is asking investors to share their leap of faith that “expected economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate”. This has become an all too familiar refrain.

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