By raising interest rates for the second time this year, Federal Reserve officials doubled down on their long-held belief that inflation will level out at their 2% target -- even though the numbers hint at another story.
The Fed has been singing the same tune on inflation for nearly the entirety of this decade, and one could be forgiven for wondering how much inflation is really playing into the Fed's decision-making process at this point. Fed Chair Janet Yellen and co. made the move to lift rates to between 1% and 1.25% even though most inflation readings - including its favored core inflation statistic - have drifted away from its long-run target of 2% in recent months. Instead, it seems that a marginally improved labor market, and a desire for more wiggle room to cut rates for a slowdown that is becoming increasingly mathematically inevitable, are motivating the push to tighten policy. That includes the Fed's outline for reducing its balance sheet, the manner of which but not the timing, was unveiled alongside the rate hike.
In her press conference following the FOMC announcement, Yellen said that a price level decline in March and slowdown in recent months were mostly attributable to one-time declines in certain goods such as wireless phone services and prescription drugs. "These price declines will as a matter of arithmetic, restrain the 12-month inflation figures until the extraordinarily low March reading drops out of the calculation," Yellen said last week (also declining to note that these price declines will most benefit and boost the short term spending power of exactly the type of consumer who has mostly been left out of the long but tepid recovery the Fed bought with its zero-rate policy and asset purchases). Nevertheless, she said that the Fed continues to believe that a robust labor market will drive level of overall prices higher toward its 2% target. New York Fed chief and loyal Yellenite William Dudley backed her statements earlier this week, arguing that improving jobs markets and wages would push inflation to the Fed's goal.
Already, though, it appears doubt is creeping in among some Fed officials' policy-tightening faith. Chicago Fed President Charles Evans toed far from the party line earlier this week saying the Fed should wait until the end of the year to consider lifting interest rates again. Though not a voting member this year, it's hard not to think his view is one that will grow among other Fed influencers if inflation readings continue to slide away from the 2% target.
Minneapolis Fed President Neel Kashkari, who dissented on the rate hike is quickly turning into the late Yellen-era Fed's top central banking heel, hinted in an interview that such a dynamic is indeed taking shape at the Fed. Other policymakers share his views, Kashkari said, but they haven't displayed the same cojones in pushing back on rates. "Maybe people aren't ready to take action yet," Kashkari said, though it's clear he's ready to give voice to the opposition if and when inflation drives a wedge in the FOMC.
Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.