Fed's preferred inflation gauge set to print lower on Bureau of Economic Analysis methodology revision
The Bureau of Economic Analysis is revising the methodology behind the Federal Reserve's preferred inflation gauge, a change that will produce a lower reported reading of that measure. The revision is expected to ease…
The Bureau of Economic Analysis is revising the methodology behind the Federal Reserve's preferred inflation gauge, a change that will produce a lower reported reading of that measure. The revision is expected to ease pressure on the central bank to raise interest rates, putting rate policy expectations in focus for bond and money markets.
The adjustment and its mechanics
The Bureau of Economic Analysis, the federal agency that compiles the price data the Federal Reserve follows most closely, is reworking the framework behind its headline inflation measure. When the new methodology takes effect, the reported number will come in lower than it would have under the prior approach. The change is an accounting decision at the statistics agency, but its effect lands squarely on a live rate policy debate.
A lower print on the Fed's preferred inflation gauge weakens the statistical case for additional rate increases. The central bank has weighted this measure heavily in its rate deliberations. A revision that reduces its reported level shifts the apparent urgency of further tightening, even if underlying consumer price conditions remain unchanged.
The rate setup
Pressure on the Fed to raise rates has been a defining force in markets through the current tightening cycle. A methodological revision at the Bureau of Economic Analysis that mechanically reduces the gauge the central bank tracks most closely alters the framing of that pressure without touching the actual economic data. The Fed responds to the reported numbers it receives, and the reported numbers are about to change.
Rate-sensitive markets are in focus as investors assess what a lower headline reading means for the expected path of policy. The gap between reported inflation and the Fed's stated target is the figure that drives the rate calculus, and the BEA's revision moves that gap.
What to watch
The next confirmable event is the publication of revised figures once the Bureau of Economic Analysis methodology change takes effect. The size of the downward revision, and whether it is large enough to materially shift the apparent gap between reported inflation and the Fed's target, will determine how the central bank frames its next policy guidance.