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Back to the Future

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Given all the hubbub about inflation in the Fed's statement this week, we thought we'd take a look back at the last time the Fed started getting concerned about inflation and what actually happened to measures of inflation. Below is the FOMC rate decision press release from May 16, 2000 which was the last time the Fed raised the Fed Funds rate and came after a series of rate hikes that started in 1999 and became more and more hawkish - which is to say more and more fearful of inflation. (the underline text is my emphasis).

"The Federal Open Market Committee voted today to raise its target for the federal funds rate by 50 basis points to 6-1/2 percent.

Increases in demand have remained in excess of even the rapid pace of productivity-driven gains in potential supply, exerting continued pressure on resources. The Committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy's outstanding performance.

Against the background of its long-term goals of price stability and sustainable economic growth and of the information already available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

CPI (y/y) at the time was 3.2%. It got as high as 3.8% in January 2001 and fell straight down from there to the 2002 lows of 1.1%.

Should we be concerned about inflation all of a sudden because the Fed is now 'concerned'? Well, given their track record - of being worried about precisely the wrong thing at the wrong time and evidenced by their 1H:2000 missives - I should say not.

This is yet another reason to be worried about deflation - because the Fed apparently isn't.

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