Yellen says Fed may have ‘misjudged’ inflation
Federal Reserve Chair Janet Yellen conceded Tuesday that inflation may be weaker than Fed officials have anticipated, a development that could lead to a more gradual rise in interest rates.
While several Fed policymakers have raised that possibility, Yellen’s remarks represent her most detailed and explicit acknowledgment that the Fed may have been too confident in its long-held view that inflation will soon pick up and move toward the Fed’s annual 2% target.
“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” Yellen said in prepared remarks at a meeting of the National Association for Business Economics in Cleveland.
She added that “downward pressures on inflation could prove to be unexpectedly persistent.”
If inflation remained sluggish, that “would naturally result in a policy path that is somewhat easier than that now anticipated.”
Yellen said several forces could be suppressing inflation, including a labor market that may not be as tight as it appears; weak long-running inflation expectations by investors, employers and consumers; and factors such as discounted online shopping.
The Fed has raised its benchmark short-term interest rate three times since December to a range of 1% to 11⁄ 4%.
Last week, it maintained its forecast of three quarter-point rate hikes next year but cut its projection from three to two increases in 2019, lifting the rate to 2.9% by 2020.
The Fed’s preferred measure of inflation fell to 1.4% in July from nearly 2% early this year. Yellen said the Fed’s baseline outlook still calls for an acceleration and blamed the recent retreat on a drop in wireless service prices due to the rollout of unlimited data plans, among other temporary factors.
But she also gave more weight to the view that wages and prices could continue to edge up slowly because of longer-term obstacles.