A quick look at the Federal Reserve’s public clues on September 20 shows little sign it’s ready to reward bad behaviour.
Bad behaviour of inflation, that is. And when I say inflation is misbehaving, I am not talking about a jump in prices that would, in the past, have warranted higher interest rates or the threat of them. In today’s world, inflation is too low, despite very low unemployment that would typically correlate with rising wage growth and inflation.
Instead of accelerating, inflation has receded since hitting the Fed’s target early in the year. There’s been a bit of hand-wringing about this from Fed officials in speeches; policymakers in Europe and Japan also wrestle with it. But there’s nothing in the September 20 Federal Open Market Committee statement that suggests the Fed is altering course fundamentally.
The only thing that really changed in the key second paragraph of the Fed’s statement is a reference to the hurricanes that ripped through Texas and Florida and their impact on energy prices and the broader economy. That may push inflation up temporarily, but that’s about it.
Echoing language used after the last meeting, the Fed said: “Apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 per cent in the near term but to stabilise around the Committee’s 2 per cent objective over the medium term.”
The committee still pencilled in one more quarter-point rate increase this year, according to projections released simultaneously, and three next year. Same forecast as in June, the last time the committee published projections.
Granted, the Fed did bring down a bit its projection of the longer-term benchmark interest rate to 2.8 per cent, from 3 per cent in June. Either target feels like a long way off.
And the central bank’s expectation for next year for its preferred measure of inflation came down a touch to 1.9 per cent from 2 per cent.
For now, it looks like the Fed stays the course. The question is whether inflation finally makes a serious course correction.
Persistent low inflation is a bit of a “mystery”, Yellen told a press conference in response to a question. “I will not say that the committee clearly understands what the causes are.”
Yellen gets great credit here for her candour. She elaborated that at various points in the past few years the inflation rate could have been explained by residual slack from the Great Recession, oil price swings and so on.
Why the problem is present today is something entirely separate.
The economic models say that with the jobless rate this low, it won’t last. Other central bank chiefs say much the same thing, for this is in many ways a global problem.
Left unsaid is whether there is something unique to the modern economy that’s fundamentally different from the past, not just cyclical.
Perhaps it is that the labour market has become truly global, joining commodities, goods and services? With her widely-recognised academic credentials in the labour market, Yellen is in an excellent position to try to figure this out.
And to be fair to Yellen, she stressed that if low inflation just won’t budge, then officials are prepared to adjust policy as needed. In the meantime, we look for clues.
