The current Federal funds rate is now at just slightly under 1%. Of course, there are some people who always want higher rates, no matter what. They confidently declare that the U.S. economy is now aproaching full employment and that inflationary pressures will soon start to build up.
Except for the fact that:
1) Prime age labor force participation rate is still about 2 percentage points below pre-crisis levels (chart 1).
2) First quarter GDP growth was far from spectacular. Even though in all fairness it must be said that Q1 GDP growth has been horrible for years and that there is usually a rebounce in Q2.
3) Nominal wage growth is still below pre-crisis levels.
4) The Fed undershot its 2% inflation target for many consecutive years, basically since the financial crisis with the exception of 2012.
5) Financial markets expect that the Fed will continue to undershoot its inflation target in the years to come. Tips spreads currently suggest that the CPI will only average about 1.8% over the next decade (chart 3). However, the Fed actually targets a different measure of inflation, PCE (Personal Consumption Expenditure), which usually tends to be 20-30 basis points lower, meaning that the deviation from target in terms of undershooting might end up being even larger.
6) The so-called Trump reflation trade has already come to an early end. Long-term bond yields have fallen again, which probably implies that financial markets expect lower real growth and/or lower inflation rates for the foreseeable future than just a few months ago.