In the TV show Mission Impossible, Mr. Phelps is assigned a difficult mission on a weekly basis.
For the Federal Reserve, their mission was to achieve a target rate of core inflation of 2%. Unfortunately, this was Mission Impossible!
If we look back to the summer of 2012, core inflaton had actually more than doubled since January 2011 when core inflation was under 1% to March 2012 when core inflation hit 2.1%.
But core inflation started to plunge after March 2012.
Enter QE3, The Fed’s 3rd attempt at quantitative easing. Despite the growth in The Fed’s balance sheet, core inflation kept falling to today where it stands at 1.235%.
In other words, The Fed seems incapable of generating core inflation.
Why? Simply put, the employment to population ratio is lower than it was in 2007 as are real median household income and average wage growth YoY. It is difficult to generate core inflation under these conditions.
“As always, should you or any of your Fed Board of Governors fail in your mission to create core inflation of 2%, the Treasury Secretary will disavow any knowledge of your actions. This tape will self-destruct in 5 seconds.”