Inflation and the Fed

June 12, 2025
David R. Kotok
Reading Time: 2 minutes

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Dear Reader,

Do you really think that inflation is tame enough for the Fed to start cutting rates? Take two minutes to look at the data.

Here’s the Atlanta Fed’s compilation of various inflation estimators: “Inflation Project: Underlying Inflation Dashboard,” https://www.atlantafed.org/research/inflationproject/underlying-inflation-dashboard.aspx

I have excerpted a chart.

The Atlanta Fed compilation shows that the Fed hasn’t reached the 2% Core PCE target yet. And the future has headwinds with extraordinary events ahead.

Reminder from history: No president or vice president or other politician has called for the Fed to raise rates. Political interference with central bank independence is asymmetrical: The shriller they are, the more trouble they’re in as their polling numbers deteriorate.

Reminder: The US dollar is weakening against most other currencies. Weakening currencies are more inflation-prone. History repeats and repeats.

Reminder: The federal deficit originating from Washington is likely to run at 5% to 6% of GDP year after year. Rising debt/GDP slows real growth rates as higher debt burdens require continued refinancing.

IMO, the only thing that saves the US economy and financial system stability is for the Fed to maintain a policy of a positive “real” interest rate. That means the current Fed policy is about right.

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