Inflation Worries To Stall Rate Hikes? 4 Great Picks

When the Fed voted to raise rates last week, Minneapolis Fed President Neel Kashkari emerged as the lone voice of dissent. The Fed Chair and her colleagues had cited rising inflation as a reason for their decision. But Kashkari finds no evidence to that effect in his note. Instead, he wonders how the U.S. could be grappling with rising prices even as the rest of the world has experienced depressed prices since the global financial crisis.

Inflation data released over the past three months seem to bear out the Minneapolis Fed President’s views on price rise. Meanwhile, some of his colleagues at the central bank have also chimed in to record their concerns about inflation and the Fed’s likely rate hike schedule.

Some have even gone on to suggest that the Fed might not hike rates further, or at best, wait for further evidence on inflation to do. Treasury yields declined on Tuesday, heightening concerns over the issue even further. It seems investing in stocks benefiting from a soft interest rate environment may be a prudent option even at this point.

Fed’s Inflation Target Remains Evasive

In May, the Fed’s preferred inflation gauge, core PCE inflation, increased by only 1.5%. This was the poorest level recorded since Dec 2005 and far off the Fed’s target rate of 2%. Fed Reserve Governor Lael Brainard commented that the PCE measure had remained below the central bank’s target rate despite the fact that unemployment had fallen drastically.

Another Fed policymaker, James Bullard, had gone on to say that the Philips curve had failed to work in the case of the U.S. The theory underlying the curve postulates that inflation and unemployment are inversely related.

Can the Philips Curve Be Trusted?

Kashkari had raised the same issue in his note of dissent, saying that excessive faith regarding the validity of the theory was driving the Fed to make imprudent decisions. He added that the present FOMC was so focused on controlling inflation, given its belief in the Philips curve, that it was discounting the role of expectations. In effect, the central bank was repeating its mistakes of the seventies. 

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