The Federal Reserve's Shocking Shift

Next week, the Federal Reserve is poised to make a bold move by cutting interest rates, even as inflation stubbornly hovers around 3%. This situation raises a crucial question: can the Fed’s long-standing 2% inflation target still be considered realistic?

Inflation Data on the Brink

Upcoming data indicates that core CPI inflation remained steady in August at 3.1%, while the Fed's preferred measure, core PCE inflation, was reported at 2.9% in July. Easing policies during such inflation levels is a rare and unexpected maneuver.

A Historical Perspective

The last instance when the Fed eased policy with core PCE inflation at 3% dates back to the early 1990s, a dramatically different era before the digital revolution transformed our lives. Back then, the internet was in its infancy, and smartphones were nothing more than a sci-fi concept.

A Break from Tradition?

The prospect of the Fed adjusting rates for a second time this year amid higher inflation is significant. It's a potential challenge to economic traditions established over the past decades, igniting fears among inflation hawks who worry about rising government debt and long-term bond yields.

Market Reactions Are Mixed

Interestingly, financial markets appear largely unperturbed by this prospective rate cut. While inflation concerns raise asset prices, particularly gold—which has soared nearly 40% this year—overall market sentiment seems to shrug off fears related to the Fed's inflation target.

Consumer Sentiment Shifts

Fueled by recent surveys, consumers are adjusting their inflation expectations. A report revealed a rising one-year outlook to 3.2%, while three- and five-year forecasts hovered around 3% and 2.9%, respectively. With significant inflation numbers looming, could 3% be the new norm?

Political Underpinnings

President Donald Trump appears to endorse a more aggressive economic approach, seemingly accepting higher inflation as necessary for growth. As the Fed braces to make another rate cut in this unusual economic climate, many wonder: is this a prudent move or a significant misstep?

Questioning the 2% Target

Retired economist Jim Paulsen challenges the obsession with maintaining the 2% inflation target, arguing that the annual headline CPI has averaged around 2.9% recently. He cites the 'golden years' from 1992 to 1999, when inflation averaged 2.6%, advocating for more flexible and pragmatic monetary policies.

Looking Ahead: What’s Next?

As we approach Thursday's inflation report and watch the Fed's actions closely, one thing is clear: the economic landscape is shifting. A 3% inflation reading followed by a rate cut could signify a new chapter in monetary policy, questioning if 3% is indeed the new 2%.