The Federal Reserve ("Fed") might have a dual mandate, but at this juncture, it is adhering more closely to a single mandate that revolves around price stability.
Where's the Inflation?
With the unemployment rate at a 50-yr low of 3.6%, the Fed can run a victory lap for its effort in achieving the other side of its dual mandate, which is maximum employment.
The question for the Fed and many other parties, namely employees, is: why hasn't there been a meaningful acceleration in wage growth with the unemployment rate at a 50-yr low and the JOLTS -- Job Openings Report showing more available positions than there are workers to fill them?
Plenty of economists are scratching their heads over that one -- and not just the Ph.D. economists at the Fed.
In the same vein, many of those same economists have been left wondering why overall inflation hasn't been increasing at a time when central banks, and not just the Federal Reserve, have flooded the world with easy money.
In the U.S., the PCE Price Index was up just 1.5% yr/yr in April while the core PCE Price Index, which excludes food and energy, was up just 1.6%. Both measures have spent a majority of the last ten years below 2.0%, which is the Fed's longer-run inflation target.
The Fed has consistently failed to get inflation sustained at its 2.0% target despite a long-running stance of embracing some relatively accommodative monetary policy.
Some are placing blame for the low inflation on the Amazon effect, while others have pointed to the forces of globalization that have increased competition.
The answer is unclear, but what is becoming clear is that the Fed is becoming increasingly anxious about the persistence of low inflation and sliding inflation expectations.
Notably, there was no acknowledgment coming out of the June 18-19 FOMC meeting that the low inflation is "transitory." Instead, there was more concern about the pace of inflation running persistently below 2.0%. In a candid admission, Fed Chair Powell also shot down the idea of introducing a 4.0% inflation target, noting it would lack credibility considering the Fed hasn't been able to sustain 2.0% inflation.
What It All Means
The Fed's understandable fixation on low inflation will give each passing inflation report increased significance, starting with the PCE Price Index for May that will be released on Friday as part of the Personal Income and Spending Report.
Recently, the market has dialed back its expectations for a 50-basis points cut at the July 30-31 FOMC meeting, but it fully expects a 25-basis points reduction in the target range for the fed funds rate. The market, however, could think 50 basis points is back in play if the PCE Price Index is earmarked with disinflation.
On the other hand, if it holds steady or shows a pickup in inflation, one might reasonably expect the Treasury market to deflate on selling interest since it has benefited greatly from a low inflation trade that has been anything but transitory.