Re:U.S. annual inflation rate drops to 8.5%
by starkd on Wednesday August 10, 2022 @09:36AM
(#32411666)
But they've lost a lot of credibility in being able to make those projections. The inflation-is-transitory call was a major blunder.
Re:U.S. annual inflation rate drops to 8.5%
by chaorace on Wednesday August 10, 2022 @09:45AM
(#32411817)
Yes, well... they make their own predictions, so it's not really a matter of whether the public trusts the Fed as long as they are internally unified.
Public inflation expectations certainly do play a role in inflation, but, as Volcker showed us in the 80s, it doesn't matter how much credibility you have with the public if you're willing to slam on the brakes hard enough.
Re:U.S. annual inflation rate drops to 8.5%
by starkd on Wednesday August 10, 2022 @10:22AM
(#32412458)
But I think a lot of the Fed's strategy was jawboning the rate increases - aka offering "forward guidance". Notice how the rate hikes were fairly measured and tepid. They didn't even start the actual QT until a few months ago. There's a limit to how effective jawboning is, and it requires the public have credibility in the Fed to do so. Eventually, you have to back it up with actions.
Re:U.S. annual inflation rate drops to 8.5%
by chaorace on Thursday August 11, 2022 @09:39AM
(#32425365)
That's a fair point, but let's also consider that markets tend to overreact to rate hikes. The public's languid response to the Fed's inching of the interest rate may actually be a desireable outcome.
If they were truly going for shock & awe, it would have been much more effective do one single 2% hike rather than breaking it up over 3 adjustments.
Re:U.S. annual inflation rate drops to 8.5%
by jrsj on Wednesday August 10, 2022 @09:46AM
(#32411824)
I think it could have been but the underlying issues were never solved (bad enough to make inflation permanent on its own) and then energy and food markets were disrupted by escalation of war in Ukraine.
Had the federal government pursued different strategies this all could have been avoided and these rate hikes would have come at a much slower rate.
You should also keep in mind that inflation trends tend to lag behind monetary policy, so the Fed will actually pivot strategies ~6-12 months prior to when the inflation rate is projected to return to 2%. This means that the actual rate we land at will be a lot more imprecise -- potentially as high as 4% or as low as 1% -- while policy gets dialed in. The Fed has historically been fine with a sine-wave pattern of this nature so long as it averages out to 2% over time (there will also probably be some magical thinking in underweighing the past 12 months of extraordinary inflation for the purposes of such averages).
One last thing: the Fed typically uses the core PCE for measuring inflation, which excludes food and energy prices, since they're prone to price shocks. The year-over-year core PCE was 4.8% for the month of July. They'll probably choose to overshoot this measure, however, since inflation sentiment over the CPI is highly negative.