Fed staff losing faith central bank will hit 2% inflation target


  • US
  • Friday, 24 May 2019

Lower expectations: A file picture showing a woman walking past the Federal Reserve Board building in Washington. Besides Fed staffers, a number of policy makers are also wondering if inflation expectations have slipped lower. — Reuters

WASHINGTON: The Federal Reserve’s influential staff seems to have lost confidence that its bosses will achieve the central bank’s 2% target, if the minutes of the Fed’s April 30-May 1 meeting are anything to go by.

The staff forecast presented to policy makers saw inflation falling shy of 2% “over the medium term’’ even as the job market was projected to tighten further.

That contrasts with their assessment just a month and half earlier.At the March 19-March 20 Federal Open Market Committee (FOMC) meeting, staff economists working at the Fed’s Board in Washington predicted that core inflation would instead edge up to 2% next year, and stay there in the medium term.Behind the shift in the outlook: An apparent belief that inflation expectations – which can play a big role in determining actual inflation – have slipped “a bit lower’’ and are now below 2%.

“This is a striking assessment that could prove consequential in the dovish direction over the longer haul,” Krishna Guha, head of central bank strategy at Evercore ISI, said in a note to clients on Wednesday.

The latest forecast is important because it serves as a jumping off point for in-depth discussions by Fed chairman Jerome Powell and his fellow FOMC participants about their economic outlook and monetary policy.

Since introducing its 2% target in 2012, the central bank has failed to lift inflation to that level on a sustained basis.

The personal consumption expenditure (PCE) price index, the Fed’s favourite inflation gauge, rose 1.5% in March from a year-ago. The core index, which strips out volatile food and energy costs, increased 1.6%.

“Core PCE price inflation was expected to move up in the near term but nevertheless to run just below 2% over the medium term,’’ according to the staff forecast at the April 30-May 1 meeting.

“Total PCE price inflation was forecast to run a bit below core inflation in 2020 and 2021, reflecting projected declines in energy prices,’’ the minutes added.

It’s not only Fed staffers who are wondering if inflation expectations have slipped lower.A number of policy makers are too.

Some “expressed concerns that long-term inflation expectations could be below levels consistent with the committee’s 2% target or at risk of falling below that level,’’ the minutes show.

Several saw a danger that expectations would become anchored at sub-2% levels “if inflation did not show signs of moving up over coming quarters.’’

Expectations matter because they shape how households and companies act and thus can go a long way in determining where inflation actually ends up.

Consumers accustomed to meager inflation will resist paying up for goods and services. Companies, in turn, will shun giving higher wages to their workers because they fear they’ll lose sales if they raise prices to cover added labor costs.

It’s a vicious circle that difficult for monetary policy makers to break - as Japanese central bankers have found to their detriment.

At a press conference following the April 30-May 1 meeting, Powell said that “transitory’’ forces may be holding inflation down.

“Our baseline view remains that, with a strong job market and continued growth, inflation will return to 2% over time and then be roughly symmetric around our longer-term objective,’’ he told reporters. — Bloomberg


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