Fed seeks answers to missing inflation in a tight labor market
US CENTRAL BANKERS are looking for clues that underlying strength in the economy will underwrite their plans to raise interest rates for a third time this year, a record of their meeting last month showed, as officials wrestled with why inflation remains so low.
US financing conditions remain easy, the economy is expected to grow above 2 percent for at least the next two years, and unemployment dropped to 4.2% last month, the lowest since 2001. For all that, inflation rose by a mere 1.4% in the year through August, and forecasters, including those at the Federal Reserve, expect it to remain subdued for a while. They aren’t sure why. The central bank has missed its 2% inflation target for most of the past five years.
“Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent,” according to minutes of the Sept. 19-20 meeting of the rate-setting Federal Open Market Committee. The minutes, released Wednesday in Washington, reeled off a list of potential explanations, ranging from the influence of technology on business pricing and pressure on health-care costs from government policies, to elusive “common global factors.”
US central bankers next meet Oct. 31-Nov. 1 and again on Dec. 12-13. Investors have priced in a roughly 77% chance of another hike by the end of the year, according to trading in fed funds futures contracts, despite anxiety among Fed officials that something may be amiss in models they rely on to predict higher prices as the job market heats up.— Bloomberg