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The Fed is terrified Americans could get used to high inflation. It may already be happening.

today 11/12/2023
A concerning development is emerging for the Federal Reserve. The Fed is closely monitoring various risks, such as high consumer demand and geopolitical tensions in the Middle East, that could make controlling inflation more challenging. However, another important factor for the Fed is the faith that Americans have in inflation eventually returning to normal. Unfortunately, this faith appears to be diminishing. The most recent consumer survey from the University of Michigan shows that Americans' long-term inflation expectations have risen to the highest level since 2011. This erosion of trust could worsen if the Fed takes longer to bring inflation back to its target of 2%. If Americans lose faith in the possibility of inflation returning to normal, the Fed may need to tighten monetary policy further, potentially by raising interest rates or maintaining them at higher levels for longer than expected. The Fed is particularly concerned about inflation expectations becoming uncontrolled. The University of Michigan's survey is closely watched by investors and economists, although the Fed considers a range of surveys. Fed Chair Jerome Powell consistently mentions Americans' inflation perceptions during news conferences after setting monetary policy. While inflation expectations continue to worsen, the Fed's fight against inflation may become more challenging. The Fed would consider raising interest rates in the future if progress on inflation stalls or is insufficient to bring it down to 2% in a timely manner. Maintaining confidence that inflation will eventually decrease is crucial for the Fed, and the steady slowdown of inflation over the past year has helped in this regard. However, some economists believe the Fed's inflation target of 2% by 2026 is too pessimistic. Ultimately, the Fed needs to demonstrate that it is making progress in its fight against inflation. People's nostalgia for a more affordable past may have kept inflation expectations in check. The IRS has also announced new income tax brackets for the upcoming year, with adjustments made annually to account for inflation. The standard deduction will increase for individuals, married couples, and heads of households. Most filers claim the standard deduction, but some may choose to itemize their deductions if they exceed the standard deduction amount.
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