The Fed’s Alarmingly Low-Inflation Problem (Try Pathetic Wage Growth As A Culprit)

The Fed has been hawkish of late, particularly after the election of Donald Trump as President. There have been 3 rate hikes since the November 2016 election, although there was only 1 rate hike during President Obama’s 8 year stretch in office.

But in terms of inflation, where is the fire? Core PCE prices YoY is lingering well below the 2% target rate at 1.40% while the core PCE deflator (3 month annualized) is only 0.8%.

The Fed is apparently mystifyed that with U-3 unemployment at 4.3% (near full employment) why there isn’t more inflation.  The answer is found in the following chart.

Note that hourly wage growth for NFP production and non-supervisory workers (the majority of the US population) is stalled at 2.4% YoY. It had risen above 4.0% YoY before the prior two recessions, but never got above 2.7% YoY after The Great Recession.

Once again, where is the inflation fire that The Fed is supposed to extinguish with Fed Fund rate hikes?

It is not in the USD Inflation Swap Forward 5Y5Y either.

inflationswap

So, here we sit awaiting waiting to see what The Fed does to move around the US Treasury yield curve.

tyc070617

As a reminder, here is the US Treasury Actives curve as of this morning (bright green line), when The Fed began to cut the Fed Funds target rate in September 2007 and when The Fed began their Quantitative Easing (asset purchases) on 11/25/2008.

tacthist

Yellen: “Say what? All that rate-cutting and asset purchases and we still can’t generate any inflation??”

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