E Is The Fed Wrong In Caring About Wages, Not Inflation?

Fed watchers have come to believe that the Federal Reserve Bank really cares about targeting inflation at 2 percent. Some have said that is a ceiling, and some have said they may let it run a little hot above 2 percent.  But now, they are not so sure. It appears the Fed is mistakenly worried about wage increases rather than about real inflation, which is declining!



The source of the chart above is the Fred blog. We can see the green line is real GDP. The blue line is the GDP Now estimate moving past the reported GDP which lags. Fed watcher Tim Duy has said that the Fed does not act like targeting inflation is that important. He is starting to have doubts about the Fed and said:

The weak inflation numbers pose a very real dilemma for the Fed. An inflation targeting central bank should be seriously considering a rate cut. The Fed claims to be an inflation targeting central bank. But are they? We still don’t really know.

Then see from a post by Tyler Durden that the Fed is not interested in looking at inflation so much. Inflation is low, under target, but that does not matter. To Durden, the Fed is fixated on wage growth. This is what the author wrote about Pantheon Consultancy's view:

PCE data – the Fed’s preferred measure of inflation – this week fell to 1.6% Y/Y in March (exp. 1.7%); Pantheon says this will not have gone unnoticed at the Fed; the consultancy thinks it is most likely noise than it is a signal, "but the Y/Y rate is unlikely to rise much before late summer and could easily dip further in the meantime," and "if the Fed hikes this year, it will be because of accelerating wages, not the inflation rate at the time." 


“The problem for the Fed,” Pantheon says, “is that if growth continues at anything like this pace, the labour market will tighten much further this year, and the question of rate hikes will be back on the agenda.”

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Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

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Gary Anderson 1 year ago Author's comment

Update 3: The Fed clearly does not relish going toward the zero and negative rates. Normally it would be better to lower rates as a slowdown occurs, but these are not normal times. We are so close to zero that the Fed is reluctant to weaken banks heading into a probable recession.

Gary Anderson 1 year ago Author's comment

Update 2: Donald Trump wants lower wages. He also wants lower interest rates. But lower rates in a low inflationary environment could increase wages even faster!

Gary Anderson 1 year ago Author's comment

Update 1: Clearly the Fed is obsessed with pruning wages. I believe the Fed is more obsessed with pruning wages than it is in targeting inflation or NGDP targeting! See this for more proof of this Fed obsession: Fed's Andolfatto, Powell, and the Secret Goal of the Fed: talkmarkets.com/.../feds-andolfatto-powell-and-the-secret-goal-of-the-fed