The Fed Opened Pandora's Box

Long time readers of this blog will understand what I mean just from the title.    Those of you who are newer to this site, welcome, and let me explain what I am talking about.

Shortly after the Fed started cutting rates back in September, I started blogging about the fact that they were likely opening a "Pandora's Box" in regards to inflation.  Even after the last Personal Consumption Expenditure's Index (PCE) came out, I reiterated that same fact and forecast. 

You see, the Fed's favorite gauge on inflation is the PCE report.  You may have already known the Fed's "comfort zone" is between 1 and 2%.  The last report, although with in the "comfort zone", ticked up from 1.8% to 1.9%.  It went virtually unnoticed since it was in the acceptable range and other economic data was relatively friendly for a Fed rate cut, which they ultimately did.

This morning, the most recent PCE data was released and guess what.  My warnings came to fruition.  The numbers released this morning showed year over year inflation at 2.2% (0.3% higher than the last report) and that should be making the Fed "uncomfortable" now. 

So, as I asked before, will the Fed regret cutting rates?

Comments

[PeterT]

Robert, I'm still of the opinion that rates will fall lower. It amazes me that consumer spending was as high as it was last month. I've been out at the malls and the crowds are much thinner than usual. I will be shocked if this is a great Christmas season for the retailers. There are signs of inflation, but wages aren't heading higher and that means the consumer is getting squeezed.

I think we are going to be going back and forth quite a bit for a while, but if we are in a downturn, that is deflationary. Inflation won't be the highest priority.