The economy has an inflation problem, and the Federal Reserve has three tools to fight it.
The problem was brought home again last week with the news that the personal consumption expenditures (PCE) price index accelerated to 4.1% annually in May, up from 3.8% in April. Excluding food and energy, core PCE hit 3.4%, up from 3.3% in April. As oil prices retreat, inflation is expected to moderate, but remain above the Fed’s 2% annual target.
That puts the Fed in a tough spot, especially as its new chairman, Kevin Warsh, has vowed to deliver price stability. The Fed can influence economic conditions in three ways: by adjusting the target range for the federal-funds rate, making changes to its balance sheet, and communicating expectations about inflation and future policy moves.