The Fed’s Preferred Inflation Gauge Stays Cool, Keeping a Rate Cut Imminent
What is the Fed's preferred inflation gauge?
The Fed's preferred inflation gauge is the core personal consumption expenditures (PCE) price index. This index measures the change in prices for goods and services purchased by consumers, excluding food and energy.
Why is the Fed's preferred inflation gauge important?
- It is a more accurate measure of inflation than the consumer price index (CPI), which includes food and energy prices.
- It is more closely aligned with the Fed's dual mandate of price stability and maximum employment.
- It is the inflation gauge that the Fed uses to set interest rates.
What is the Fed's target inflation rate?
The Fed's target inflation rate is 2%. This means that the Fed aims to keep inflation at or below 2%.
What is the current inflation rate?
The current inflation rate, as measured by the core PCE price index, is 1.6%. This is below the Fed's target of 2%.
What does this mean for interest rates?
The low inflation rate means that the Fed is likely to keep interest rates low. This is good news for borrowers, who will benefit from lower interest rates on loans.
Additional Information
In addition to the core PCE price index, the Fed also monitors other measures of inflation, such as the CPI and the producer price index (PPI). The CPI measures the change in the prices of goods and services purchased by consumers, while the PPI measures the change in the prices of goods and services sold by businesses.
The Fed uses a variety of tools to control inflation, including interest rates, open market operations, and quantitative easing. Interest rates are the most direct way to control inflation. By raising interest rates, the Fed can make it more expensive for businesses to borrow money and invest. This can lead to lower prices for goods and services.
Open market operations are another way to control inflation. By buying and selling Treasury securities, the Fed can increase or decrease the money supply. Increasing the money supply can lead to inflation, while decreasing the money supply can lead to deflation.
Quantitative easing is a type of open market operation in which the Fed buys large quantities of Treasury securities. This can lead to a significant increase in the money supply and can be used to combat deflation.
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