Morning Must-Read: Ryan Avent: The Fed Prepares to Make a Mistake
...is hustling along, inflation remains well below the Fed's target rate.... I think... the Fed is close to making a big mistake.... Set aside potential downside risks (from a Russian financial crisis, or renewed euro-zone troubles, or a Chinese hard landing, or lord knows what else) and just focus on the dynamics within the American economy. Almost since the Fed announced that it was officially targeting an inflation rate of 2%, as measured by the price index for personal consumption expenditures, actual PCE inflation has run below the target, and often well below. It remains below target now....
You'd have to be mad to think that inflation will average 2% over the course of this business cycle. The Fed has been content to let inflation rest below target for most of the last four years.... The longer the Fed fails to hit 2% on average the more likely the public is to expect below-target inflation on an ongoing basis....
And while inflation is low interest rates will remain low.... The risk to waiting to tighten is so comparatively small. That's the worst bit. In a year or two people will find themselves wondering why the Fed made this particular error, and there simply will not be good answers to give.
