The Fed’s Dilemma: The Wrong Kind of Inflation

Jon Banking, Economy, Energy, Fiscal Policies, Government, Market Commentary

Observe how two years later, the Fed’s expected ‘transitory’ factors are still here:
‘Recent sizable declines in oil prices will likely hold down overall inflation in the near term. But as the effects of these oil price declines and other transitory factors dissipate and as resource utilization continues to rise, the Committee expects inflation to move gradually back toward its objective.’ -Federal Reserve Chairman Janet Yellen, December 2014
‘…once oil and import prices stop falling, the downward pressure on domestic inflation from those sources should wane, and as the labor market strengthens further, inflation is expected to rise gradually to 2 percent over the medium term.’ -Yellen, February 2016
The Fed’s next move with interest rates is the biggest issue driving global credit and equity markets. The fundamental idea is that the economy is like a candle: if it burns too bright, it burns out faster; if it burns too low, it could snuff out. Moderating the flow of oxygen is a means of managing the candle’s flame.

This post was published at FinancialSense on 03/10/2016.