Fed Easing Cycles and Inflation

Friday’s CPI report, which showed a slight up-tick in year over year core CPI, lowered investor expectations of rate cuts later in the year. Furthermore, with core inflation (2.7%) running above the Fed’s preferred range of 2.0%, it solidified expectations that following this week’s policy meeting, the Fed would remain on hold and maintain its bias that upside risks exceed the downside.

A look at the historical record however indicates a different picture. The chart below displays the year over year core CPI since 1960 along with the Fed’s current preferred rate of inflation (red line). We also noted with shading each of the periods where the Fed was lowering rates. As the chart illustrates, in the ten easing cycles since 1960, the core inflation rate has only been below 2% at the start of an easing cycle during one other period. In fact, if the Fed were to start easing monetary policy with inflation at current levels, it would mark the third lowest inflation rate at the start of an easing cycle.

 

Comments

[Frankie]

Very interesting! Keep 'em coming!