January 31, 2017
The Fed raised interest rates last month because they said the economy was getting close to full employment and they were worried about accelerating inflation. The data do not provide much support for this concern.
Last week the Commerce Department reported that the core personal consumption expenditure deflator rose at just a 1.3 percent annual rate in the fourth quarter. This is well below the 2.0 percent average rate targeted by the Fed.
This morning the Bureau of Labor Statistics reported that the Employment Cost Index, which includes benefits and not just wages, rose at 2.0 percent annual rate in the fourth quarter and has risen just 2.2 percent over the last year.
The latest data suggest that inflation might even slowing rather than rising, indicating that there is no reason whatsoever for the Fed to weaken the labor market and slow job growth with further rate hikes. In other words, the Fed is shooting at phantom inflation.
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