Another week, another inflation report, more interest rate resetting

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The seal of the Board of Governors of the United States Federal Reserve System is displayed in February 2018 in the ground at the Marriner S. Eccles Federal Reserve Board Building in Washington. Richmond Federal Reserve President Thomas Barkin on Friday downplayed recent signs that the economy is strengthening, but also said he is prepared to keep raising interest rates in smaller increments as often as needed to quell inflation. ANDREW HARNIK — THE ASSOCIATED PRESS FILE

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By Tom Hudson

Miami Herald

Last week it was an inflation report followed by a recalibration of how high the Federal Reserve will raise interest rates to cool it down.

It may be the same in the week ahead.

The central bank’s favored inflation gauge, the Personal Consumption Expenditure, will be released on Thursday. Don’t be shocked if it mimics what the January Consumer Price Index reported. Last month’s CPI showed prices increased from a month earlier while continuing their months-long trend of slowing compared to a year earlier. Still, inflation remains uncomfortably high, posing an ever-present risk to the economy.

Four regional Federal Reserve presidents were exercising the bank’s open mouth policy the same day as the CPI data last week.

“Normalizing” is how Richmond Fed President Thomas Barkin described inflation to Bloomberg TV. “It feels to me like the risk is on the inflation side at this point rather than the economy side.” Meaning: rates still need to go higher.

The central bankers are balancing a strong job market helping support inflation through wage increases with escalating borrowing costs in the effort to slow inflation. Expect more open mouth exercises in the week ahead.

Traders, economists and Fed-watchers talk about a “terminal rate.” That’s the interest rate the Federal Reserve will stop raising its target short-term rate. Is it 5%? 5.5%? 6%?

The target range today is 4.5%-4.75%. The market is predicting a terminal rate of 5.5% this summer, according to the CME FedWatch Tool.

So, further tightening is likely. Just how much is what has investors anxious because the expected terminal rate continues climbing. The anticipated terminal rate was 4.6% just five months ago. By December, that had increased to 5.1%.

Demand-side economist John Maynard Keynes is often cited as having said, “When the facts change, I change my mind.” Even though the accuracy of that attribution is questionable, the sentiment continues to be the Fed’s playbook.

And Thursday’s PCE data likely will be more evidence that the Fed’s mind on how high interest rates need to go in its inflation fight is changing.