You’ll recall the Fed is the only central bank that has a DUAL mandate to curb both inflation and unemployment.  All other central banks worry about inflation only.

The “unemployment rate” has dropped nicely, which suggests the Fed does NOT need to be stimulative.  However, the mandate doesn’t distinguish between the normal “unemployment rate” and the “long-term unemployed.”  This latter is still terribly high.  Wasting five years of your life NOT working is a waste of a NATIONAL resource.  Not working reduces GDP.  Thus, the Fed does need to remain stimulative.

The inflation rate has been worrisome because it is too LOW.  Deflation is much more pernicious and dangerous than inflation.  We have been fearful of falling into deflation, which is one of the primary reasons the Fed has been so stimulative, i.e., trying to CREATE inflation.  Tuesday’s CPI release was up 2.1% over last year, which is close enough to the Fed’s goal of 2.0%.  Does that mean the Fed can become LESS stimulative — Nope!  The Fed doesn’t care about CPI.  They care about the PCE deflator or Personal Consumption Expenditures Index, which is only up about 1.5% – well below the Fed’s target of 2.0%.  Does that mean the Fed should continue being stimulative — Yep!

At 2:15 PM Wednesday, I expect the Fed will continue to hold interest rates stable and will again decrease the monthly quantitative easing by another $10 billion.  This would still be stimulative but slightly less so.  More importantly, the market also expects this.  Anything different will create a market reaction.