The Best-Case Scenario for the Fed’s Inflation Fight Is Dead
Fed Governor Christopher Waller recently laid out his decision tree for interest rates. The base case is still very much in play.
Fed Governor Christopher Waller isn’t throwing out his base case.
Photographer: Bess Adler/Bloomberg
The latest reacceleration in underlying inflation just took the Federal Reserve’s best-case scenario off the table, and that may help explain the market’s violent selloff in the wake of the data: The central bank isn’t likely to suspend aggressive interest-rate increases soon. But the base case for monetary policy — a 4% terminal fed funds rate by late 2022 or early 2023 — remains very much intact despite all the market hysteria.
The core consumer price index — which excludes volatile food and energy prices — jumped 0.6% in August and accelerated to 6.3% from the period a year earlier. But the core version of the personal consumption expenditures price index, which the Fed uses for its 2% inflation target, is likely to slow to around 4.3%, according to Anna Wong, Bloomberg Economics’ chief US economist, who adjusts the CPI basket to match the PCE’s weights. That would already be in line with where the Fed has estimated core PCE would be in the fourth quarter, according to its June Summary of Economic Projections. Among other things, the PCE gives less weight to housing and automobiles.