OK folks, you’ll be reading so many responses to the rising US CPI saying its in components the Fed cannot control with rates.
The basic objection to the higher CPI is that its in components that the Fed can do nothing about. So the Fed should still cut because rates have no impact on these components.
This ignores what history tells us (over, and over, and over again), that a central bank faced with inflation in components it cannot control will hike regardless (or, in the current Fed situation, will not cut).
The thing a central bank can address is driving down demand. This is why these components still matter.
Think rising oil prices. The Federal Reserve has zero control over these.
Think supply chain snarls. The Federal Reserve has zero control over these.
However, the Fed will do what it can do when faced with situations such as this, which is to address the demand side. Which means higher rates (or holding rates high, as now) to drive demand in the economy down and address rising prices in this way. This happens over and over again, don’t get caught in the trap of ‘the Fed can’t control oil prices (for example) with rates so they’ll do nothing’. It doesn’t work this way.
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For the current situation, the Fed will not cut in June because inflation is still too high and not falling. We’ve just a third consecutive month of higher core CPI.
This article was written by Eamonn Sheridan at www.forexlive.com. Source