/Fed Officials facing reality about Inflation and Unemployment

Fed Officials facing reality about Inflation and Unemployment

In Washington, officials from Federal Reserve are struggling to make sense of a new economic reality in which low inflation and low unemployment are persisting side by side.
At the Fed’s most recent meeting, in late July, most officials said they expected the phenomenon to fade away by next year as low unemployment finally starts to drive up inflation.
But a growing number of officials see the pattern as proof that the Fed needs to adjust its assumptions, as it is mentioned in an account of the meeting that the Fed published on Wednesday.
At the July meeting, the Fed left its benchmark rate in a range of 1 percent to 1.25 percent. It also said it planned to start reducing its asset holdings “relatively soon.” The minutes said some Fed officials were ready to announce a starting date for the reductions, but most favored just a little more patience. Analysts expect an announcement after the Fed’s next meeting, Sept. 19 and 20.
The timing of the Fed’s next rate move is uncertain at this point. The Fed entered the year predicting three rate increases of a quarter-point each; so far it has delivered two, with a third seen possible in December.
But the weakness of inflation, which the Fed now expects to remain below its target annual pace of 2 percent for the fifth-consecutive year, looks like becoming a big issue.
Most Fed officials subscribe to a view of inflation in which prices rise more quickly as unemployment declines. In this case, companies are forced to offer higher and higher wages to keep their employees.
Now, the Fed is confronting “the coexistence of low inflation and low unemployment,” a phenomenon that inverts the “stagflation” experience of the 1970s, when both inflation and unemployment climbed.
The meeting account said most officials continued to regard low unemployment as the most important factor. They said inflation was rising slowly because of temporary factors, like a decline in cellphone service prices. And they remain inclined to raise the Fed’s benchmark rate later this year.
But as low inflation persists, alternative theories have blossomed. Some Fed officials see evidence that the low unemployment rate overstates the health of the job market, and therefore that the Fed should wait to raise interest rates. Low rates support job growth by encouraging borrowing and risk-taking.
Uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade and health care, was tending to weigh down firms’ spending and hiring plans,” the minutes said.
“It would not be desirable,” the minutes said, “for the current regulatory framework to be changed in ways that allowed a re-emergence of the types of risky practices that contributed to the crisis.”
We can only hope for better days to come.