FOMC Debate on Possible Reasons and Significance of Sub-Target Inflation

January 8, 2014

Aggressive quantitative stimulus by the Federal Reserve has for some time been defended because both its mandates — a sufficiently healthy labor market and price stability — are not being met and that faster economic growth is needed to close those gaps.  While the U.S. unemployment rate has declined more quickly than Fed officials had anticipated, much less progress has been made in raising inflation and expected inflation back into the comfort zone of officials.

The December 17-18 FOMC meeting accordingly devoted time to analyzing why inflation might be so low, whether it is likely to climb on existing policy back toward target, how long that process might take, and what risks exist that could keep inflation too low.  That critical discussion is summarized in the following paragraph of minutes of the meeting.

Inflation continued to run noticeably below the Committee’s longer-run objective of 2 percent, but participants anticipated that it would move back toward 2 percent over time as the economic recovery strengthened and longer-run inflation expectations remained steady. Several participants suggested that some of the factors that had held down inflation recently, such as the slowing in price increases for medical care and banking services, were likely to prove transitory. Some participants suggested that inflation, while low, was unlikely to slow further, pointing to core, trimmed mean, or sticky-price inflation measures as indicative of fairly steady underlying price trends; most measures of wage gains were also steady. Nonetheless, many participants expressed concern about the deceleration in consumer prices over the past year, and a couple pointed out that a number of other advanced economies were also experiencing very low inflation. Among the costs of very low or declining inflation that were cited were its effects in raising real interest rates and debt burdens. A few participants raised the possibility that recent declines in inflation might suggest that the economic recovery was not as strong as some thought.

At the December meeting, policymakers revised projected GDP growth slightly upward but did not make any meaningful modifications to their forecast of inflation.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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