Inflation data later today in the US is expected to creep higher
The Fed's preferred measure of inflation, the PCE core deflator is expected to jump to 1.9% y/y from 1.6% y/y previously. For the Fed, it will be a great sign of confidence that sticking to their policy direction over the past year is paying off.
But in reality despite all the rate hikes and tightening, the Fed's mission is not close to being over yet. The real issue is seeing a sustained level of inflationary pressures. I reckon the Fed would be comfortable with inflation sitting between 1.8% to 2.3% - as it allows them for more flexibility with their tightening cycle.
While the Fed was previously worried about the lack of inflationary pressures, the opposite also doesn't work in their favour if you think about it. If inflation surges closer to 3.0% than it does to 2.0%, then the Fed will be forced into a more tedious balancing act than it is currently managing.
If they hike too fast, it risks threatening the expansion of the US economy. But if they hike too slow, then they risk inflation overshooting way above their target.
But of course, a lot of this will also depend on what is driving inflation higher. If they are indeed temporary factors, then the Fed shouldn't be too concerned.
The big worry is if more permanent and lasting factors are driving inflation higher to the point it overshoots the 2% target by quite a distance, then the Fed will face a big struggle in taming the once sleeping beast.
