The Fed is worried that Americans will become accustomed to high inflation. It may already be happening. -CNN

Washington, D.C. CNN –

A worrying sign is emerging for the Federal Reserve.

The Fed is keeping a close eye on several risks that could make its job of containing inflation even more difficult, such as fervent consumer demand putting some upward pressure on prices and the potential impact of geopolitical tensions in the Middle East on oil prices.

But the US Federal Reserve is also paying close attention to whether Americans still believe that inflation will return to normal at some point. This belief seems to be waning.

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

And those perceptions could continue to worsen the longer it takes for the Fed to get inflation back to its 2% target. According to their latest economic forecasts, released in September, Fed officials do not expect inflation to reach 2% until 2026.

If there’s one thing that would rattle the Fed, it would be a worsening of inflation expectations.

“If we see that consumers or businesses really feel that the long-term level of inflation … is rising, if that is their expectation, we need to act and get that under control,” Atlanta Fed President Raphael Bostic told Bloomberg earlier this month.

If Americans lose faith that inflation can ever return to normal, that would prompt the Fed to tighten monetary policy even further – either by raising interest rates or keeping them high for much longer than expected.

The Fed’s key interest rate is currently at a 22-year high 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 rise and are not under control, the Fed will definitely act,” Luke Tilley, chief economist at Wilmington Trust Investment Advisors, told CNN.

“That’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 deteriorate further, and the Fed is reviewing 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 surveys among investors and economists.

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

During his final post-meeting press conference earlier this month, after officials voted to keep interest rates on hold, Powell said “longer-term inflation expectations remain well anchored.”

But the clock is ticking, inflation remains well above 2% and some economists believe the last mile in the Fed’s inflation fight could be the most difficult.

“I remain prepared to support a rate hike at a future meeting if incoming data suggests that progress on inflation has stalled or is insufficient to bring inflation down to 2% in a timely manner,” said Fed Governor Michelle Bowman, one of the Fed’s most aggressive officials, said last week at a New York Bankers Association forum in Palm Beach, Florida.

The key word there is “contemporary.”

Sustained inflation could potentially “unanchor” inflation expectations or cause a continued deterioration in Americans’ perceptions of inflation. However, it is unclear how long it would take for sustained high inflation to happen.

Tilley said “the Fed is being far too pessimistic” if it expects inflation not to reach 2% until 2026.

Ultimately, the Fed just needs to have faith 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, the New York Fed said.

A recent analysis by the bank of consumers’ views on inflation found that “consumers today know enough about the Federal Reserve to recognize that its policies are the most important factor in the recent and expected future declines in inflation.”

The Fed may simply need to continue to demonstrate 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, not where they arrive before the end of the trip,” Drew Matus, chief market strategist at MetLife Investment Management, told CNN. “The Fed really just wants people to not expect inflation to stay at 4% forever.”

So what has kept inflation expectations under control for so long? Matus said it could just be nostalgia.

“People want to believe that the future will be like the good old past because the brain can handle it,” he said. “They’re trying to update their memory of when things were more affordable, and the Fed really needs to be on guard now about the threat of an inflation shock.”

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 the 2024 tax year.

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

The IRS makes inflation adjustments to tax brackets, the standard deduction, and some other tax breaks annually.

01:45 – Source: CNN

What the new tax brackets mean for you

For individuals and married couples filing separately, the new federal standard deduction increases to $14,600 from $13,850 this year.

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

And for people filing as head of household, the standard deduction is $21,900, up from $20,800 today.

Most filers claim the standard deduction. Others itemize their deductions because, when added together, they amount to more than the standard deduction.

For example, if you are a single filer and your mortgage interest, charitable contributions, and allowable share of your state and local income taxes in 2024 are more than $14,600, you would likely itemize your deductions to save more taxes.

Monday: Tyson Foods Earnings. Fed Governor Lisa Cook delivers remarks.

Tuesday: Home Depot revenue. 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 investment and the unemployment rate for the month.

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

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

Friday: The US Department of Commerce releases October data on housing starts and building permits. San Francisco Fed President Mary Daly delivers remarks.