Promises, promises

As we know, the Fed has announced an inflation ceiling of 2% AND that it will keep short term rates close to zero at least until the later part of 2014.

I believe these two commitments are contradictory if we manage to achieve a decent economic recovery, and it is looking more and more like we are finally getting exactly that.

Here is a chart of the implied 2 year ahead level of inflation expectations derived using yields on inflation protected securities (TIPS):

The red line is the Fed's 2% ceiling.

People, can I get a YIKES?

The source for this chart is here, the hat tip goes to LeBron, and the source also argues that markets are strongly pricing in a Fed rate increase in 2013.

At this point, unless the recovery falters, I don't think the Fed will keep EITHER of its two promises

Entre la espada y la pared?

As I've been droning on about, the Fed has promised to (a) keep rates near zero until at least the second half of 2014, and (b) keep inflation at or below an upper limit of 2%.

The latest report on the CPI came out today.

Behold (clic the pic for a more glorious image):

CPI inflation (blue line) is currently 2.9%. CPI less food and energy inflation (red line) has now climbed over 2% and is trending upward.

Something has got to give. Either the recovery falters or the Fed has to take a pass on one of its promises

Yes, I know that the Fed target is probably some genetically modified version of the GDP deflator.

Here's a slightly less updated inflation graph using the deflator for personal consumption expenditures (from Tim Duy at Mark Thoma):

Even this cherry picked series is over 2% and the series less food and energy is trending up and poised to hit 2%.

Please understand that I am not advocating that the Fed tighten policy right now. I think 3 or 4 percent inflation for a while would not be a disaster.

I am saying that the Fed has made some very strange promises of late that don't bode well for its vaunted "credibility".