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  • What Would Happen if the Fed Caves to 4%-5% Core PCE Inflation, Gives Up On 2%, as Some Folks Are Clamoring For?

What Would Happen if the Fed Caves to 4%-5% Core PCE Inflation, Gives Up On 2%, as Some Folks Are Clamoring For?

April 17, 2023

by Wolf Richter Wolf Street

The economy would muddle through, but in the markets, all heck would break loose. Here’s why.

The issue is this: Since April 2022, the Fed has hiked its policy interest rates by 450 basis points, but consumer price inflation as measured by the “core” PCE price index – which excludes volatile food and energy products – has been moving up and down in the same high range without much visible improvement.

The core PCE price index, the Fed’s favored inflation index for its 2% inflation target, was at 4.6% in February, according to the latest release, roughly the same as in July 2022. “Core” CPI, which has been running at about 5.5% for months, actually accelerated in March.