The Fed Isn’t Getting the Economy It Expected

livemint.com:

When the Federal Reserve’s rate-setting committee sits down Tuesday and Wednesday, one thing it has to grapple with is that underlying inflation is looking cooler than it thought just a few months ago. Another: The economy is looking much stronger. The central bank’s policy makers will need to update the economic projections to reflect these changes.

But an environment with a bit less inflation and more growth has interest-rate implications, too. While policy makers are almost certain to keep rates on hold, and might be comfortable leaving them on hold for the remainder of the year, rate cuts are likely to be even further from their minds now. The last time the Fed released projections, at their June meeting, they showed that policy makers on balance thought that their preferred measure of consumer prices, from the Commerce Department, would be 3.2% higher in the fourth quarter this year from a year earlier.

They forecast that core prices, which exclude food and energy items to better capture inflation’s underlying trend, would be up 3.9%. That headline inflation forecast might end up being in the ballpark, but mostly because of the run-up in fuel prices after Saudi Arabia and Russia extended crude-oil production cuts. For core inflation to hit the Fed’s projection, Morgan Stanley economists’ estimates indicate it would need to increase at a 4.5% annual rate in the final four months of this year, after rising at a 2.6% rate over the prior four months.

Morgan Stanley economists’ own forecast calls for core prices to be up 3.3% in the fourth quarter from a year earlier. Other forecasts are also now below the Fed’s, with both Goldman Sachs and JPMorgan Chase penciling in a 3.4% gain in core prices, for example. This is good