For Investors Only: Inflation Is Causing A Problem For The Fed ....

Updates

May 8, 2013: The Fed's credibility is testes as inflation drifts below target. Reuters is reporting:

With the inflation rate about half of the Federal Reserve's 2.0 percent target, the central bank is facing a major test and some experts wonder whether it will eventually need to ramp up its already aggressive bond buying program.

The Fed cut official interest rates effectively to zero in late 2008 during the financial crisis. Since then, it has bought more than $2.5 trillion in bonds to bolster an anemic economic recovery and speed up the decline in unemployment.

Despite those actions, its favored inflation gauge, the Personal Consumption Expenditures (PCE) price index, has fallen to a 3-1/2 year low of 1.0 percent.

Further, by the Fed's own forecasts, inflation is likely to remain short of the central bank's target for years.

Don't bet against the Fed. 

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.... or better said, the lack of inflation is causing a problem for the Fed.

The PCE inflation index is the Fed’s preferred measure of inflation. And both PCE inflation, and the core measure that excludes food and energy, are moving away from the central bank’s 2% target. The data was released as part of the Commerce Department’s report on personal income and consumer spending on Monday.

“At this moment, we think that the Fed will continue QE3 at the current pace of monthly purchases until the end of September. However, if inflation continues to fall further, we think that would increase the possibility of extending QE3 well into 2014 without tapering it,” said economists at Nomura in a note to clients.

In fact, the real question may be, how much more can inflation soften before the Fed will accelerate the $85 billion a month in asset purchases it’s currently engaged in? So far, it’s not enough to prompt action, economists say.

This is actually quite incredible, when you think about it.

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