The August Personal Consumption Expenditures Price Index, released September 26, shows a slight increase in the rate of inflation. The 2.7% increase is still nowhere near the Federal Reserve (Fed)’s target of 2.0%, but low enough to restore investors’ confidence that the Fed will do further reductions in interest rates during their remaining two meetings this year.
Earlier this month, the Fed executed its only interest rate reduction this year, and markets felt confident that more cuts would be forthcoming. This led to several days of modest but steady gains. But that confidence began to erode, and we experienced the very rare occurrence of all three major stock indices sustaining loses three days in a row. That downward trend ended on September 26 when all three indices responded with modest gains to the news of the August Personal Consumption Expenditures Price Index.
More information on the recent Fed’s rate reduction may be found HERE
The Personal Consumption Expenditures Price Index generally receives little or no coverage by most major news sources even though it is the index that the Fed prefers to use when determining interest policy.
Source: U. S. Department of Commerce, Bureau of Economic Analysis (BEA)
As this table indicates, this index has remained relatively stable over the last four months, which will most likely enable Fed’s chief Jerome Powell to push for further interest rate reductions.
Not everyone is enamored with the Federal Reserve System’s independence, its ability to control monetary policy, or even its mere existence. The late Milton Friedman, one of the most respected free market economists, was adamantly opposed to the Federal Reserve. He went as far as to propose that it should be abolished and replaced with an automatic system based on a mathematic model. His proposal did not get far and it is not likely to happen any time soon.
However, we still have substantial opposition to the way the Fed operates. Most notably is President Trump’s recent effort to reduce the autonomy of the Fed. It appears that ultimately, the role of the Fed will be decided by the U. S. Supreme Court. Until then, it will be worthwhile to pay attention what the Fed does, and how it affects our economy.
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