Something is shifting in the inflation picture
21 days ago
- Fed officials are divided on whether to hike or hold interest rates; the author recently shifted from hold to hike.
- Upside risks to inflation have worsened since July, including prolonged Middle East conflict, trade war with Canada, and AI buildout causing chip shortages.
- The author argues for a modest rate hike (quarter point in September, possibly 50-75 bps total) as risk management to ensure inflation trends down to 2%.
- Inflation data show modest disinflation but remain far from 2%; 12-month changes slow, 3-month changes are more encouraging but seasonal patterns make progress questionable.
- The Summary of Economic Projections (SEP) is a useful exercise for deliberation; the author's own dot plot evolved from cuts to hold to hikes.
- The Fed owes a clear explanation for its decision; if confident inflation returns to 2%, say so; otherwise, act to restore confidence.
- Additional comments highlight Cleveland Fed nowcasters expecting core PCE rates around 0.27-0.28% and political considerations near mid-term elections.