Fed likely to focus on low inflation but hold rates
Unless inflation picks up, some foresee no more rate hikes this year
The Federal Reserve has already achieved one of its two mandates: With the unemployment rate at just 4.4 per cent, the Fed has essentially maximised employment.
It’s the Fed’s other goal — price stability — that’s stayed persistently out of reach. Inflation has been edging further below the Fed’s 2 per cent target. Problem is, too-low inflation tends to slow consumer spending, the US economy’s main fuel. Many consumers delay purchases if they think the same price — or a lower one — will be available later.
Low inflation will likely be a key discussion point when the Fed holds its latest policy meeting, which starts on Tuesday. The central bank has raised its benchmark interest rate twice this year, but no one expects another hike when its meeting ends Wednesday. And unless inflation picks up, some analysts foresee no further rate increase this year.
Less sure
Fed Chair Janet Yellen deepened the uncertainty earlier this month when she sounded less sure about her position that a slowdown in inflation this year was due to temporary factors. Yellen conceded that Fed officials were puzzled by recent developments. Her remarks lifted financial markets as investors interpreted her words to suggest that the Fed might slow its pace of rate increases.
“In the past, Yellen was pretty confident that inflation would come back, but that is now in doubt,” said Sung Won Sohn, economics professor at California State UniversityChannel Islands. Over the past 12 months, the inflation gauge the Fed monitors most closely has risen just 1.4 per cent, according to the latest data. That’s down from a 1.9 per cent year-over-year increase in January. In part, it’s why some economists say they suspect the Fed may be keeping its rate increases on hold, waiting to see if inflation in coming months rebounds from its current slowdown.
After leaving its key rate at a record low near zero for seven years after the financial crisis erupted in 2008, the Fed has raised it modestly four times — in December 2015, December 2016 and twice so far this year, in March and June. Even now, the rate remains historically low, in a range of 1 per cent to 1.25 per cent.
Months ago, the Fed had signalled its readiness to raise rates three times this year on the assumption that it needed to be more aggressive to ensure that consistently low unemployment didn’t contribute to high inflation later on.
In June, Yellen and other officials sought to explain away the unwelcome slip in inflation as a result of such one-time factors as a plunge in consumer cell phone charges and a dip in prescription drug prices.
But in delivering the Fed’s semi-annual report to Congress this month, Yellen acknowledged some doubt. She described inflation as a “twoedge” problem, with the threat that prices could either rise too slowly or suddenly jump if a tight job market triggered wage pressures that stoked inflation.
Yellen didn’t rule out another rate hike this year. But investors have themselves grown more uncertain, with the CME Group’s closely watched gauge foreseeing a 47 per cent chance of another rate increase by year’s end.