Fed rate cut now signals 3% inflation is the new 2%

The Federal Reserve is widely expected to cut interest rates next week even though inflation is still around 3 per cent, a full percentage point above the official goal. This raises an uncomfortable question: is the central bank’s 2-per-cent inflation target still viable?

Data on Thursday is expected to show that annual core CPI inflation held steady in August at 3.1 per cent. Annual core PCE inflation, the Fed’s preferred measure, was 2.9 per cent in July.

Easing policy with inflation at this level would be a rare step.

Of course, the Fed cut rates late last year when core CPI was even higher at around 3.3 per cent, though that move drew fire because unemployment didn’t rise as Fed officials had warned and long-dated yields rose.

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