Fed: Inflation may be weaker than expected | finder.com

Fed: Inflation may be weaker than expected

Peter Terlato 26 September 2017 NEWS

Inflation is rising at an annual rate of just 1.4%.

Federal Reserve chair Janet Yellen has admitted she and her colleagues may have “misjudged” the robustness of the labor market, speculating “downward pressures on inflation could prove to be unexpectedly persistent”.

Yellen made the remarks at a meeting of the National Association for Business Economics in Cleveland today.

“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,” she said.

It has been the long-held view of the Fed that inflation will tick up toward’s the annual target of 2%. This latest, and most explicit, observation by Yellen could potentially lead to a more moderate rise in interest rates.

Inflation closed in on the Fed’s 2% goal at the top of the year but has since fallen to an annual rate of just 1.4%.

Despite the Fed’s inflation puzzlement, Yellen said it would be “imprudent” to keep monetary policy on hold.

“Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession,” she added.

Last week, the Fed raised its benchmark short-term interest rate to a range of 1% to 1 ¼%, while maintaining its forecast of three separate quarter-point rate hikes in 2018. However, it trimmed its projection of three increases in 2019 to just two. This means interest rates are now anticipated to hit 2.9% by 2020.

Although the Federal Reserve remains perplexed about inflation, it has been able to meet its goals on employment. The United States’ jobless rate was just 4.4% in August, it’s lowest level in over a decade.

Data released earlier this month shows the number of labor hours worked rose decidedly during the second quarter of the year, boosting national productivity and increasing output across major industries.

Additionally, the latest consumer survey data reveals American households remain confident about their long-term financial situation, even though the latest monthly fiscal indicators represent a perceived downturn.

Janet Yellen’s appointment as Fed chair will end in February and while President Donald Trump has said she is under consideration for a second four-year term, there are at least six other candidates vying for the position.

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