Yesterday the Federal Reserve raised the benchmark Fed Funds rate … for only the third time in nearly a decade.
Since their first move in December 2015, short-term rates have gone from effectively zero up to a target range of 0.75%-1% today. Wow! Can you say “glacial pace”?
The fact is, the Fed continues to drag its feet in normalizing monetary policy because they fear deflationary forces could return with a vengeance at any time.
You can see the evidence in the fact that they didn’t change their baseline economic and financial projections one iota. The Fed’s GDP growth estimate for 2017 remains an anemic 2.1%.
But closer to real-time data from the Atlanta Fed’s GDPNow indicators show growth falling far short of that this quarter, with a forecast of just 1.2% expansion during the three months ending March!
On the other hand, the Fed’s longstanding inflation target of 2% is well within range, as you can see in the chart above. Both the core and headline Consumer Price Index (CPI) inflation rate are poised to break above the 2% period. Yesterday’s Fed policy statement even acknowledged that inflation has moved “close” to that target, with core prices “somewhat below 2 percent.”
The reality is that signs of accelerating inflation are popping up everywhere. Research from First Trust recently noted that M2 money supply is now up 6.7% from a year ago. Wage growth has accelerated too, with average hourly earnings up at a 2.5% annual pace over the past two years. That’s the fastest growth since the Great Recession ended eight years ago.
Yet there was no change in the Fed Funds rate forecast of 1.4% by the end of this year. And only a microscopic increase in the anticipated future path of rate hikes, which was bumped ever so slightly to 3% by 2019, up from 2.9% at the last FOMC meeting.
Is the Fed behind the curve? You bet they are, and they don’t seem to be worried one bit. Investors, on the other hand, are a bit more concerned about future inflation.
That’s a big reason why the price of gold rocketed more than $30 higher after the Fed’s 2 p.m. announcement yesterday and again today!