Fed ex­pected to stand pat as in­fla­tion co­nun­drum per­sists


The Nation - - WORLD BUSINESS -

THE­mori­bund in­fla­tion seen in the world’s largest econ­omy over the last year is a “mys­tery”, a “sur­prise” and a “con­cern” all at once, in the words of US cen­tral bank chief Janet Yellen.

And the dilemma – why price pres­sures have not picked up de­spite nearly a decade’s worth of fall­ing un­em­ploy­ment and growth – will be squarely at the fore when Fed­eral Re­serve pol­i­cy­mak­ers gather to­day for a two- day meet­ing in Wash­ing­ton.

If fu­tures mar­kets are to be be­lieved, the Fed will take no ac­tion on bench­mark in­ter­est rates at the meet­ing, leav­ing the tar­get range un­changed at be­tween 1 per cent and 1.25 per cent.

But it ex­pects to adopt a rate hike in De­cem­ber, its third of the year, to ward off in­fla­tion that per­pet­u­ally seems to be just around the cor­ner.

Hov­er­ing over the Fed’s de­lib­er­a­tions will be Pres­i­dent Don­ald Trump’s de­ci­sion on whether to re­place Yellen, whose term as chair­woman ex­pires in Fe­bru­ary. But to­mor­row all eyes will be look­ing for clues about what the Fed will do next.

And the camp that favours a rate in­crease likely got a boost on Fri­day when of­fi­cial fig­ures showed the US econ­omy beat ex­pec­ta­tions, grow­ing at a 3 per cent clip in the third quar­ter de­spite the pound­ing taken by the com­mer­cial and in­dus­trial hubs bat­tered by Hur­ri­canes Irma and Har­vey.

But af­ter the Fed’s most re­cent meet­ing, Yellen ac­knowl­edged that growth and job cre­ation had not pro­duced the in­fla­tion that long-prized eco­nomic mod­els say it should, leav­ing cen­tral bankers in an in­creas­ingly un­com­fort­able quandary.

“It was pretty un­der­stand­able un­til this year,” Yellen told re­porters. “But this year, it’s been a sur­prise.”

Ac­cord­ing to Yellen, she and most of her col­leagues on the Fed­eral Open Mar­ket Com­mit­tee, which sets US mon­e­tary pol­icy, now “guess” that in­fla­tion will be­gin ris­ing next year and hit their 2 per cent tar­get by 2019.

But an in­creas­ingly vo­cal mi­nor­ity on the com­mit­tee say this ex­pec­ta­tion looks less like sound fore­cast­ing based on hard num­bers and more like an untested ar­ti­cle of faith.

The Com­merce De­part­ment was due to re­lease a new batch of closely watched in­fla­tion fig­ures but these are un­likely to change the over­all pic­ture so far.

The “core” mea­sure of the Fed’s pre­ferred gauge of in­fla­tion, which strips out vo­latile food and en­ergy prices from the Per­sonal Con­sump­tion Ex­pen­di­tures price in­dex, has been be­low the cen­tral bank’s 2 per cent tar­get for more than five years.

As of Fri­day it was at a rock bot­tom 1.3 per cent. Mean­while, the core Con­sumer Price In­dex fell be­low the same tar­get ear­lier this year to 1.7 per cent and has not budged for five months in a row.

The Fed’s “Beige Book” sur­vey said this month that wage pres­sures were scant de­spite a “wide­spread” labour short­age.

Joseph Gagnon, a for­mer Fed of­fi­cial now at the Peter­son In­sti­tute for In­ter­na­tional Eco­nom­ics, told AFP the cir­cum­stances did not point to a rate hike.

“I do won­der what they’re think­ing,” he said.

“If they rely too much on their mod­els and not enough on their data, it could be a mis­take.”

The Fed has dis­missed this year’s low in­fla­tion as the re­sult of one-off fac­tors like fall­ing drug prices and mo­bile tele­phone costs. But ad­vanced economies across the world are in a sim­i­lar state, sug­gest­ing the Fed’s “tran­si­tory” fac­tors may be be­side the point.

The so-called “doves”, who favour wait­ing to raise rates, say in­fla­tion is low in large part be­cause jobs mar­kets are not as healthy as they seem.

Re­search from the In­ter­na­tional Mon­e­tary Fund pub­lished re­cently shows part- time and tem­po­rary em­ploy­ment, other­wise known as the “gig econ­omy”, ac­counted for much of the re­cov­ery in job cre­ation since the 2008 Great Re­ces­sion – hold­ing down wages and in­fla­tion as a re­sult.

Tra­di­tional mea­sures of “slack”, or the level of un­used labour on the mar­ket, may not ac­cu­rately mea­sure the amount of un­der-em­ploy­ment, al­low­ing un­em­ploy­ment data to fall while in­fla­tion re­mains tame.

“The low wage in­fla­tion to us is just the proof in the pudding that there’s a lot of labour mar­ket slack,” said Josh Bivens, re­search di­rec­tor at the left- lean­ing Eco­nomic Pol­icy In­sti­tute.

“To me, you just have to be­lieve the data. We’re not there.”

Cus­tomers shop in a pop-up Hal­loween store in Brook­lyn, New York, ahead of the Hal­loween hol­i­day to­day. Hov­er­ing over the Fed­eral Re­serve’s de­lib­er­a­tions to­day and to­mor­row will be Pres­i­dent Don­ald Trump’s de­ci­sion on whether to re­place Janet Yellen,...

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