The Consumer Price Index (“CPI”) for July rose 1.7%, shy of the 1.8% expected. Monthly CPI rose 0.1% which was less than the 0.2% estimated. Since March of this year the CPI has consistently come in below expectations. If the CPI consistently undershoots the Fed’s target of 2.0% then the Fed Chairwoman Janet Yellen might be forced to keep interest rates at artificially low levels for several more quarters.

During the Fed’s Semiannual Monetary Policy Report Janet Yellen admitted that core inflation had edged down in recent months. She also intimated the low readings might have been due to a “few unusual reductions in certain categories of prices,” and could hold down 12-month inflation until they fall out of the calculation. In my opinion, consistent growth in consumer prices below 2.0% is starting to become a trend. At some point the Fed might have to become resigned to reality – the faux wealth effect orchestrated by former Fed chairman Ben Bernanke has spurred asset prices but has not been good for the U.S. economy over the long term.

Minneapolis Fed President Kashkari – “Fed Has Luxury Of Waiting”

I believe the Fed should have normalized interest rates years ago. There is no way of telling the true output of the economy with artificially low rates for so long. However, Minneapolis Fed President Neel Kashkari believes the Fed has the luxury of waiting:

“The CPI came in today .. and again it came in low,” Kashkari, the sole dissenter against Fed rate hikes this year, told a community bankers’ forum. “We have the luxury of waiting to see what actually happens … before we decide where to go with monetary policy.”

Yellen has been adamant that the Fed remains data-dependent on rate hikes. If that is the case then the Fed might stand pat on rates. Some predict a December rate hike; however, even that is not certain.

The Fed uses personal consumption expenditures (“PCE”) as the metric to measure inflation. Its target is 2.0%.

The index grew 1.6% in 2016 and has never reached 2% since the Financial Crisis of 2008. I do not believe the Fed can fix structural issues with the U.S. economy and should get out the way. However, it could be controversial if Yellen raised rates with inflation below the Fed’s 2.0% target. With easy money continuing to flow it could mean real estate and the equity markets could remain elevated for some time.


I believe Yellen really wants to normalize rates but CPI growth will let her. It is now time for the Fed to provide a normalized interest rate environment and let asset prices adjust. If the Fed remains data dependent that likely will not happen. The Fed’s wealth effect has helped the investor class, yet economic data could have her boxed in, unable to undo it.




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