Translating Fedspeak To Plain English

Every pundit and commentator in the known universe has now spoken at length on the meaning and strategy, and pitfalls of the FOMC’s non-taper decision. Much of the commentary is insightful and interesting reading full of complex reasoning about complicated economic theories.

But after all of that what should one do? One of the oldest truisms on Wall Street is “Don’t fight the Fed.” 

The Fed’s greatest fear is deflation.  The leadership of the Fed believes it has the tools to defuse inflation and they will not be too bothered by inflation unless it rises above the 2 to 3% annual rate. But these same economics wizards have relatively few weapons against outright deflation.  The Fed’s preferred inflation measure is the so called core PCE statistic published with quarterly GDP estimates.

Matthew Boesler of Business Insider explains the most recent reading:

The Fed's Favorite Measure Of Inflation Plunges Further

Read more: http://www.businessinsider.com/core-pce-plunges-in-q2-2013-9#ixzz2gVh3IeNv

Core personal consumption expenditures, an inflation indicator reported in the U.S. GDP release, stood at only 0.6% in the second quarter, according to the third and final Q2 GDP reading published by the U.S. Bureau of Economic Analysis this morning.

Core PCE of 0.6% marks a sharp drop in inflation from the first quarter, when core PCE stood at 1.4%.  from Business insider

The drop from 1.4% rate in 1^st qtr to 0.6 in the 2^nd qtr is substantial and ominous though it is only one reading. Until that one statistic rebounds there is no chance of any meaningful taper. The Fed is saying decisions about a taper are data dependent and they are telling the truth. Until core PCE is rising and much closer to 2% they will not act to tighten unless forced by some type of market panic.