Fed seeks an­swers to miss­ing in­fla­tion in a tight la­bor mar­ket

Business World - - LABOR & MANAGEMENT -

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

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