Fed marching on despite US inflation slump

NEW YORK: The Federal Reserve sent a strong signal that it will raise interest rates this month and soon begin shedding some of its US$4.5 trillion in bond holdings, despite some weak recent US inflation readings.

Fed Governor Jerome Powell, an influential policymaker and among the last to speak publicly before a mid-June policy meeting, said the US economy was “healthy” and the central bank should continue to edge toward a more normal footing after nearly a decade of crisis-era stimulus.

“While the recent performance of the labor market might warrant a faster pace of tightening, inflation has been below target for five years and has moved up only slowly toward two per cent, which argues for continued patience, especially if that progress slows or stalls,” said Powell, one of four governors at the Fed Board.

“If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates,” he added without mentioning the June 13-14 meeting, when the Fed is widely expected to raise rates for the third time in six months.

Two months of weaker-thanexpected price readings have spurred concern that the Fed, which has a two per cent inflation target, could delay two more planned rate hikes this year. Its preferred measure was 1.5 per cent in April.

Powell said the gradual inflation rise “appears to have paused” due in part to temporary factors, “and there are good reasons to expect that inflation will resume its gradual rise.”

“Today, the economy is as close to our assigned goals as it has been for many years,” he said, reinforcing similarly upbeat remarks on Tuesday in New York by Fed Governor Lael Brainard.

Turning to the plan to begin shedding bonds later this year, which risks a surge in market yields if the Fed surprises investors, Powell said the market’s so-far muted response “suggests that there need not be a major reaction” when the process begins. — Reuters