The Federal Reserve targets employment and inflation, not growth.

Generally they move hand in hand but when inventories, weather and a change in healthcare laws drives most of the miss in the GDP report the Fed can look past it. What they can’t look past is tomorrow’s PCE report.

After struggling around 1.0-1.2% for a year, US inflation is beginning to rise. The CPI measure has already hit 2% but the Fed’s preferred measure is the core PCE deflator. It was at 1.4% in April and is expected to hit 1.5% tomorrow.

US core PCE

US core PCE

If the number is strong you can forget about the soft GDP numbers and the Fed will get back to worrying about the current state of the economy.