FED's Goal For Inflation Versus Market's Real Inflation

FED monthly meeting to determine interest rates are on a monthly basis except for month of August. August is a month where FED does not convene to determine rates but at end of the month there is the Jackson Hole Economic Symposium. Not to go off too far in a tangent each FED meeting the month after there is a release of the meeting minutes. It so happens to come out on the third Wednesday of each month. Tomorrow 8/17/2022 will be another release of the most recent minutes that happens at 2pm est.

FED Expectations

Straight out of the Federal Reserve (FED) website:

The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy.

The short of this is the FED wants to target inflation growth at 2%. The number currently is at 8.5% based on latest CPI data.

The CPI had fallen from a high of 8.8% the prior month but still overall it is way extended from the typical month and way far out from the FED's expectation of 2%.

What FED Will Do To Subdue Inflation?

At current pace the fall in CPI is slow but we are not sure if it will accelerate. What we do know is the FED's ideal 2% is no where close to actual inflation. In all likelihood the FED will be increasing the interest rate so the question then is by how much?

CBOE has prediction of a 0.75% most likely increase at 57.5% chance of happening while 1% increase with 42.5% chance of happening. At minimum coming FED meeting that will happen in September in all likelihood the rate will hit at least 2.75% but could go as high as 3.25%.

We have one month to wait for when the meeting and likely rate hike will come in but while that is happening the real inflation rate is running hot at 8.5%. We do not have to be a math genius to realize that 3.25% and 8.5% are significantly different. The concern is if real inflation will continue to fall and fall at a rapid rate.

If September CPI rises?

This would likely be a risk off event and investments values will likely fall. That is stock market and crypto market which has been mostly correlating in 2022 will see price drop with a higher CPI print. We will have to watch and see how CPI does then.

One component used in calculating CPI is rental markets. Although if you read carefully into how CPI calculates housing you many think this is not as much of a concern but the reality is rental prices continue to climb even if it is a slower climb now than in past months. This all equates to higher inflation numbers. Of course we have gasoline and energy prices falling that helps lower the CPI number. Yet prices are not fallen as rapidly to make the CPI accelerate down fast enough.

Gasoline alone is still over 30% higher than where it was at the start of last year. There are many stats leading us to believe that CPI may stubbornly stick around at the higher single digits. All in all we should be cautious in what we invest in as quite literally the market prices are skating on thin ice. It may only take one higher CPI number to make haste for markets to sell. Will that happen will remain to be seen.

None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!

LeoFinance = Financial Blog
LeoDex = Hive trading exchange for Secondary Tokens, Low 0.25% fees for deposits and withdraws.
HiveStats = Hive stats per user
LeoPedia = Informative content related to anything about Crypto and how to make financial gains in crypto!
CubDefi = LEO Finance's Defi with CUB Token