The Fed is preparing for the worst. Inflation is said to take longer than expected

More and more voices are leaning towards the view that the recession will not arrive or will be really mild. In general, the mood in the market is positive. But central bank officials themselves are considerably more sceptical.

The Fed says inflation will continue to crush the economy

Two Federal Reserve officials suggested that inflation could persist longer than expected after the central bank's most closely watched inflation gauge rose the most in months.

Cleveland Fed President Loretta Mester and Fed Governor Philip Jefferson said they remain concerned about the inflation rate, which remains well above the Fed's 2 percent annual target.

Inflation does indeed remain above the 2% target... Source

Mester reiterated that while inflation has eased, the overall level remains too high. She pointed to recent Cleveland Fed research and a paper that suggested inflation could be more persistent than currently thought.

"I see the risks to the inflation forecast as skewed to the upside and the costs of continued high inflation as significant," Mester said at the U.S. Monetary Policy Forum in New York. "So in my view, at this point, with the labor market still strong, the costs of early policy easing still outweigh the costs of overshooting."

Those comments came at a time when the Fed's preferred inflation gauge - the personal consumption expenditure (PCE) index - unexpectedly accelerated in January, rising 5.4% year-on-year last month . Excluding volatile food and energy prices, the inflation gauge rose 4.7%, both accelerating after several months of decline.

PCE index. Source.

In month-on-month terms, the PCE index rose 0.6% in January from December. Core prices were also up 0.6% in January from the previous month, compared with a 0.4% increase in December. Friday's figures came a week after the government released its consumer price index, which showed a similar increase in the inflation rate.

By betting on a final rate above 5.25%, the market is effectively betting that the recent growth and inflation momentum will be sustained into the summer.

A final rate above 5.25%? Source

Mester said the latest inflation data shows the Fed needs to continue raising rates, but stopped short of suggesting a 50 basis point rate hike at the next meeting in March . Mester said last week that she would like to raise the benchmark interest rate by 50 basis points at the last meeting to try to reach the maximum rate more quickly, though she also did not want to surprise markets.

Similarly, Boston Fed President Susan Collins, speaking at the same monetary policy forum on Friday, said inflation was still too high and that the Fed had more work to do.

"Inflation remains too high, and the recent data reinforce everyone's view that we have more work to do to bring inflation down to the 2 percent target," Collins said. "I foresee further rate hikes to get to a sufficiently restrictive level and then stay there for some time, perhaps longer."

Jefferson also spoke, going somewhat against the grain, saying that the limited supply of workers for needed jobs, which is pushing up wages, suggests that inflation may be slowly cooling.

"The persistent imbalance between labor supply and demand, along with the large share of labor costs in the service sector, suggests that high inflation may be coming down... but only slowly," he said.

How do you see it? Is inflation going to start falling in earnest, or are we going to have to live with it for a while?

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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