Washington DC

A worrying sign is starting to appear for the Federal Reserve.

The Fed is closely monitoring several risks that could make its task of controlling inflation even more difficult, such as red-hot consumer demand keeping some upward pressure on prices and the possible effects of geopolitical tensions in the Middle East. Orient on oil prices.

But the U.S. central bank is also keenly interested in whether Americans still believe inflation will eventually return to normal. This faith seems to be eroding.

The latest University of Michigan consumer survey released Friday showed Americans’ long-term inflation expectations rose to 3.2% this month, the highest level since 2011.

And those perceptions could continue to deteriorate as the Fed takes longer to bring inflation back to its 2% target. Fed officials don’t expect inflation to reach 2% until 2026, according to their latest economic projections released in September.

If there is one thing that could shake the Fed, it would be a worsening of inflation expectations.

“If we see that consumers or businesses are really starting to feel like the long-term level of inflation… is increasing, if that’s their expectation, we need to act and we need to get a handle on the situation,” he said. Atlanta. Fed Chairman Raphael Bostic told Bloomberg earlier this month.

If Americans lose confidence that inflation will return to normal, that will prompt the Fed to tighten monetary policy even further – either by raising interest rates or keeping them high for much longer than usual. foreseen.

The Fed’s policy rate is currently at its highest level in 22 years and investors are already expecting the central bank to keep rates high for longer.

“I worked at the Fed for six years and if inflation expectations are rising and not under control, the Fed will absolutely act,” Luke Tilley, chief economist at Wilmington Trust Investment Advisors, told CNN.

“It’s the only thing that gives them trouble sleeping at night.” They don’t lose sleep over recessions because they come and go, but they lose sleep over rising long-term inflation expectations,” he said.

It’s unclear whether inflation expectations will continue to deteriorate, and the Fed is looking at a wide range of surveys, not just those from the University of Michigan. But the university’s survey is one of the most closely watched by investors and economists.

The Fed focuses specifically on long-term inflation expectations, and Fed Chairman Jerome Powell makes a point of mentioning the state of Americans’ inflation perceptions at every news conference after officials set monetary policy (which happens eight times a year).

At his final post-meeting news conference earlier this month, after officials voted to keep rates steady, Powell said “long-term inflation expectations appear to remain well anchored.”

But time is running out, inflation remains well above 2%, and some economists say the latest step in the Fed’s inflation fight could be the toughest.

“I remain willing to support an increase in the federal funds rate at a future meeting if available data indicate that progress on inflation has stalled or is insufficient to return inflation to 2% in a timely manner ” said Fed Governor Michelle Bowman, one of the Fed officials. the most hawkish officials said last week at a New York Bankers Association forum in Palm Beach, Florida.

The key word here is “timely.”

Persistent inflation could eventually “unanchor” inflationary expectations or cause a steady deterioration in Americans’ perception of inflation. But it’s unclear how long it will take for persistently high inflation to cause this.

Tilley said “the Fed is way too pessimistic” in expecting inflation not to reach 2% until 2026.

Ultimately, the Fed just needs to maintain its confidence that the inflation monster will one day go away, and the steady slowdown in inflation over the past year has helped in that regard so far. , according to the New York Fed.

A recent analysis by the bank of consumer perspectives on inflation showed that “consumers today know enough about the Federal Reserve to recognize its policies as the most important factor behind the recent decline and future of inflation.

Perhaps the Fed just needs to continue to prove that it is making progress in its historic fight against inflation.

“I think 2% is just a number, because what’s more meaningful is the direction of travel rather than where they arrive before the end of the journey,” Drew Matus, chief strategist, told CNN markets at MetLife Investment Management. “The Fed just wants people not to expect inflation to stay at 4% forever.”

So what has kept inflation expectations in check for so long? Matus said maybe it was just nostalgia.

“People want to believe that the future will be like the good old past because that’s something the brain can get around on its own,” he said. “They’re trying to refresh their memory of when things were more affordable and what the Fed really needs to pay attention to is the risk of an inflationary shock right now.”

If you like to plan your taxes in advance, the IRS this week released the new inflation-adjusted income tax brackets and standard deduction amounts that will be in effect for tax year 2024 .

Translation: These are the numbers that will be relevant for the tax return that most Americans will file in early 2025, reports my colleague Jeanne Sahadi.

The IRS makes inflation adjustments to tax brackets, the standard deduction, and certain other tax breaks each year.

1040 tax return form with USA America flag and dollar bill, American individual income.

What the new tax brackets mean for you

For individuals and married people filing separately, the new federal standard deduction will increase to $14,600, up from $13,850 this year.

For married couples filing jointly, the standard deduction will increase to $29,200, up from the current $27,700.

And for people who declare that they are head of household, the standard deduction will be $21,900, compared to $20,800 today.

Most tax filers claim the standard deduction. Others will itemize their deductions because, taken together, they add up to more than the standard deduction.

For example, if you are a single filer and your mortgage interest, charitable contributions, and the qualified portion of your state and local income taxes total more than $14,600 in 2024, you will likely itemize your deductions to save more on your taxes.

Monday: Tyson Foods Earnings. Fed Governor Lisa Cook delivers a speech.

Tuesday: Home Depot earnings. The US Department of Labor releases its Consumer Price Index for October. Fed officials Phillip Jefferson, Michael Barr, Loretta Mester and Austan Goolsbee deliver remarks. The National Federation of Independent Business releases its Small Business Optimism Index for October. China’s National Bureau of Statistics releases October data on industrial production, retail sales, fixed asset investment and unemployment rate for the month.

Wednesday: Target earnings. The UK Office for National Statistics releases inflation data for October. The US Department of Labor releases its producer price index for October. The US Commerce Department releases October retail sales figures. Michael Barr, Fed Vice Chairman for Supervision, delivers a speech.

THURSDAY: Gains from Walmart, Macy’s and Gap. The U.S. Department of Labor reports the number of new jobless claims during the week ended November 11, as well as export and import prices for October. The Federal Reserve releases October industrial production figures. The National Association of Home Builders releases its housing market index for November. Fed officials Lisa Cook, Michael Barr, Loretta Mester, John Williams and Christopher Waller deliver remarks.

Friday: The U.S. Commerce Department releases October data on housing starts and building permits. San Francisco Fed President Mary Daly delivers a speech.

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