Weak inflation erodes conviction at Fed on rate hikes

At its latest meeting, the Fed scaled back its inflation forecasts for this year to 1.6 percent but according to policymakers' median forecasts, still sees inflation rising to 2 percent next year. After acting with admirable dispatch and goal to end the Great Recession and spur a faster recovery for years, the Fed is in real danger of not completing the task it set itself ten years ago, and has instead backslid into caring more about keeping unemployment and inflation at levels that wealth owners and corporate managers are comfortable with, rather than at levels that benefit American workers. What's next for the central bank?

However, Fed Chair Janet Yellen said Wednesday at a press conference that "it's important not to overreact to a few readings, and data on inflation can be noisy". Presently, the Fed expects economic growth of 2.2% in 2017, which is up from its last projection.

"In the 1970s, that faith led the Fed to keep rates too low, leading to very high inflation".

Dallas Federal Reserve President Robert Kaplan on Friday also signaled the decision to raise rates earlier this week was a tough one, although he in the end supported a rate hike and said he feels comfortable with that decision. But some were surprised by accompanying detail indicating the Fed meant to press ahead with further rate rises in 2017 and begin reducing its $4.5trn QE balance as early as this year. In short, the economy is sending mixed signals: "a tight labor market and weakening inflation". Health care and education cost have grown faster, but prices for clothes, furnishings and food have generally increased less or no more than household incomes - benefiting the poor who suffered the most during bouts of high inflation. Modern monetary policy rests heavily on a central bank's ability to shape expectations, and the Fed and others have been so successful in keeping inflation down that now they seem unable to shift sentiment in the opposite direction.The Fed is also no longer quite sure about how some basic aspects of the economy are working these days. "I'm going to need to see that improvement in inflation".

This story has not been edited by Firstpost staff and is generated by auto-feed.

  • Zachary Reyes