Data on Friday provided a further jolt in the wrong direction. Year-ahead inflation expectations in the University of Michigan's survey of consumer sentiment rose from 3.2% to 3.5% in May, the highest level since November, and longer term expectations ticked higher as well.
While a month's reversal may not be significant, if it continues it would challenge the Fed's current assessment that expectations are “anchored” – and add to arguments made by Logan and some others that rates may not be high enough to finish the inflation fight.
Anchored expectations are considered by Fed officials as an important sign of their own credibility, and an aid in bringing inflation back to 2%.
The survey also showed overall consumer sentiment nose-diving, a confusing signal that could point to lower consumer spending in the months ahead even as households expect higher inflation.
'RAISES QUESTIONS'
In an essay published earlier this week, Minneapolis Fed President Neel Kashkari also raised the possibility that rates may not be restrictive enough, given the continued strength of the U.S. economy, particularly the housing market.
“It is hard for me to explain the robust economic activity that has persisted,” Kashkari said. “It raises questions about how restrictive policy really is.”
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