Yellen Defends Fed Rate Rise Plan Despite 'Mystery' of Low Inflation -- 3rd Update
September 26 2017 - 3:54PM
Dow Jones News
By David Harrison
CLEVELAND -- Federal Reserve Chairwoman Janet Yellen on Tuesday
defended the central bank's projection for a gradual path of rate
increases over the next few years despite the past few months of
unexpectedly low inflation.
She said, however, the Fed could slow the pace of rate increases
if low inflation persists and officials conclude it reflects
long-term changes in the economy rather than transitory
factors.
Ms. Yellen and her colleagues have been grappling with subdued
inflation despite a growing economy and vigorous labor market. That
has presented officials with a dilemma. From one point of view, the
weak inflation readings could be a sign that interest rates should
remain lower than anticipated. Yet keeping interest rates low for
too long could cause inflation to grow too rapidly and inflate new
financial bubbles.
Inflation, under the Fed's preferred measure, has undershot the
central bank's 2% target for much of the past five years. Although
Ms. Yellen said she expects inflation to gradually move up to the
target, she acknowledged the uncertainty surrounding that
prediction. The Fed has raised rates four times since 2015 and has
penciled in one more rate increase this year.
"How should policy be formulated in the face of such significant
uncertainties? In my view, it strengthens the case for a gradual
pace of adjustments," Ms. Yellen told a National Association for
Business Economics conference in Cleveland. "It would be imprudent
to keep monetary policy on hold until inflation is back to 2
percent."
Ms. Yellen's speech boosted market expectations of a rate
increase at the Fed's December meeting. Investors pegged a 77.9%
chance of a rate move Tuesday afternoon, up from 72.8% a day ago,
according to CME Group data.
How to respond to weak price growth has been a burning topic
among Fed officials. Some, such as New York Fed President William
Dudley, argue that the strong economy will soon push up inflation,
suggesting a need to continue raising interest rates.
"I expect inflation will rise and stabilize around [the Fed's]
2% objective over the medium term," he said Monday. "In response,
the Federal Reserve will likely continue to remove monetary policy
accommodation gradually."
Others, such as Charles Evans of the Chicago Fed, see no
indication that inflation is about to turn higher.
Speaking in Michigan on Monday, Mr. Evans said he believed
weaker inflation reflected structural changes in the economy rather
than a temporary phenomenon.
"I think we need to see clear signs of building wage and price
pressures before taking the next step in removing accommodation,"
he said.
In her talk, Ms. Yellen sought to strike a middle-of-the-road
approach, one that weighed the risks of raising rates too slowly
against the risks of raising rates too fast before concluding that
the Fed should stick to its current cautious course.
Moving too quickly could slow growth unnecessarily, she said,
but added that "we should be wary of raising rates too gradually."
Moving too slowly could create "an inflationary problem down the
road that might be difficult to overcome without triggering a
recession," she said.
Still, the Fed's understanding of inflation is "imperfect," she
said, calling the shortfall in inflation "a mystery." "We recognize
that something more persistent may be responsible for the current
undershooting."
In a presentation filled with footnotes and slides, Ms. Yellen
summarized academic research on inflation's recent behavior. It
could be, she said, that the labor market still has a way to go
before it has fully healed from the recession. Or inflation
expectations, which affect actual inflation, might have weakened.
Those conditions, she said, could "result in a policy path that is
somewhat easier than that now anticipated."
It could also be that something has fundamentally changed in the
economy, either globally or in the U.S., that would hold down price
growth, she said.
For instance, spending on health care, which represents 8% of
consumer expenditures, could be slowing in part because of the 2010
health-care law, she said. U.S. inflation also could be more
closely tied to the global economy, which means weakness abroad or
cheaper labor costs in other countries could be holding down
domestic prices and wages. Ms. Yellen also cited the possibility
that online shopping could be holding down inflation.
Although the Fed chief didn't say she believes one of these
factors is behind recent slow price growth, she said officials
would keep a close eye on developments.
"We will monitor incoming data closely and stand ready to modify
our views based on what we learn," she said.
Harriet Torry and Michael S. Derby contributed to this
article.
Write to David Harrison at david.harrison@wsj.com
(END) Dow Jones Newswires
September 26, 2017 15:39 ET (19:39 GMT)
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