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." 

And:

“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.”

This approach may be wrong, as we see from the GDP Now chart above, and the GDP Now retail inventory investment chart below, which shows a massive retraction in retail inventory investment. The economy could go either way and Duy acknowledges that, but he is concerned about the downside, not the upside of inflation. Real change in inventory investment has fallen off a cliff after an optimistic start in the latter half of 2018.

The Fed has an interesting dilemma. The GDP is slowing, but service jobs are exploding as reported by Trading Economics. Rates will be in neutral until GDP shows a pattern of consistent slowing. Trump won't get what he wishes for even though there are clear indications of slowing. Kudlow and Trump are likely getting this. Inventory build driving GDP to 3.2 percent growth is hardly an improvement of end demand for a very punished consumer. But bragging about a high number like that doesn't win POTUS and his adviser any sympathy if they believe things are weaker as to GDP. 

Here is the jobs report, which is strong, but GDP is still slowing in real time according to GDP Now.

ADP Job Growth

Small business has a dim view of economic growth going forward so that sentiment matches GDP Now reporting. So does small business job creation which is slow.Here is small business sentiment, which has taken a hit and is lower for the 1st quarter:

Source

If the Fed lowers rates soon, it will be a real admission that they they were optimistic in raising rates in December, and were mistaken. The Fed does not like to admit they are mistaken. 

For further reading on GDP Now:

A GDP Now Chart Worth Watching

GDP Now (Explained)