Federal Reserve: Weak Inflation a Worry
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This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm Charlie Turner in New York. At their last policy meeting on October 31st and November 1st, Fed officials said they'd likely raise short-term interest rates in the near term because of a strengthening economy. But the meeting minutes released Wednesday indicated that some members of the panel were worried about persistently weak inflation. Let's get some more details from Wall Street Journal reporter Harriet Torrey, who joins us from Washington. Harriet, hasn't the Fed predicted that inflation would hit the central bank's annual target of 2% and now there are worries that it could stay below that level for longer than anyone had expected?
Yeah, so this is the new aspect that we saw in the minutes is that Fed officials are starting to say now that they... So for most of this year, inflation has been below target, but Fed officials were attributing it to transitory factors like price drops in certain categories, for instance, wireless plans for mobile phones. But now they're saying actually those transitory factors might not be as transitory as we've thought. And there could be something more persistent going on. And we got a bit of a preview of this concern when Janet Yellen was speaking in New York. She did mention that she and her colleagues are not certain that it's transitory and that they're monitoring inflation very closely.
And what we saw in the minutes sort of reinforces that. And the Fed is really not sure at all why inflation hasn't been picking up.
What did the Fed minutes reveal about a potential near‑term rate hike?
And it's been weak for several years now. But in previous years, There seemed to be a very concrete reason, like, for instance, the dollar appreciated very strongly or oil prices were right down, import prices were down. Now we have a strengthening economy. The labor market is doing really well. And yet inflation is still persistently below target. And there's a lot of head scratching going on as to why that might be.
Might they be coming around to the realization that there is probably a disconnect between a strong labor market and inflation?
Why are policymakers worried about persistently weak inflation?
That is one thing that they've been discussing. That's something that came up in the minutes, that the responsiveness of inflation to what they call resource utilization could be weaker than it has been in the past. I mean, another thing that they mentioned is that it could just be that the tight labor market is taking longer to sort of show through in the inflation data. So on the one hand, we have these concerns about weak inflation being persistent. On the other hand, there are certain Fed officials saying, you know, this inflation could break out at any moment. And that's why we need higher rates is because, you know, inflation could suddenly spike. So it's interesting. It seems that there are quite a few theories sort of doing the rounds.
You know, perhaps there's more slack in the labor market than we thought. But yeah, it's just ongoing concerns about low inflation.
I'm speaking with Harriet Torrey of The Wall Street Journal, and you're listening to Your Money Matters. Thanks for listening, everyone. Harriet, what annual level is inflation at right now?
So the Fed's preferred measure of inflation is the PCE measure, and that was 1.6% in September. And then core PCE, which is the number that you have when you strip out volatile prices for food and energy. was only 1.3%, which might have had something to do with the hurricanes that happened in the late summer. So still quite a long way off from 2%. And the Fed has also been saying the inflation target is symmetric, which suggests that they'd be happy for it to go over 2%. But really, it hasn't shown much sign that it's doing that. So this is the big thing in the minutes. The market's expectations for a rate increase in December have been extremely high for quite a long time now. And the mention that a short-term rate increase would be warranted in the near term appeared to sort of confirm that about December and about the immediate path of rates.
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