Federal Reserve grapples with mystery of persistently low inflation

Friday, 13 October 2017, 04:54:37 PM. Federal Reserve officials struggled in September to come to terms with persistently low inflation but decided to continue to signal the possibility of raising interest rates for a third time this year. The minutes of their most recent policy meeting, released Wednesday, show ...

Federal Reserve officials struggled in September to come to terms with persistently low inflation but decided to continue to signal the possibility of raising interest rates for a third time this year.

The minutes of their most recent policy meeting, released Wednesday, show that a group of Fed officials expressed concern that low unemployment could cause inflation to surge and a rate hike was needed, presumably when it meets in December. Another group suggested that no further rate increases were called for in the near term.

Investors, though, have settled around the notion that a December rate hike is all but guaranteed. The latest CME Group survey, based on trading on the direction of the Fed's benchmark rate, places the probability of a December rate hike at 88%.

But some economists express more uncertainty. They think the Fed might not raise rates again this year unless economic reports between now and its Dec. 12-13 meeting show that inflation has begun to edge up toward the Fed's 2% target.

“The Fed is clearly inching closer to pulling the trigger for a third rate hike this year, but that doesn't seal the deal,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. “At the moment, the minutes say several members say the outlook is uncertain.”

Earlier this year, Fed officials including chief Janet L. Yellen pointed to transitory factors, such as falling prices for cellphone plans, to help explain why inflation was probably moving further below the Fed's 2% inflation goal. But with undesirably low inflation persisting, she and other officials have recently acknowledged that something more long-lasting may be happening.

The minutes of the Fed's September meeting revealed that the mystery over inflation was a key talking point during the two days of discussions.

“Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors but also the influence of developments that could prove more persistent,” the minutes said.

“A few of these participants thought that no further increases in the federal funds rate were called for in the near term,” the minutes said.

Another group of Fed officials continued to express concerns that inflation could rebound very quickly, given low unemployment. The jobless rate in September fell to a 16-year low of 4.2%; it was at 4.4% at the time of the Fed's discussions.

This group worried that low unemployment might spark demands for higher wages. Rapidly rising inflation pressures could then cause the Fed to start hiking rates more quickly and run the risk of pushing the economy into a recession.

This group also worried that the low Fed rates could result in bubbles in asset prices such as stocks, leading to financial instability.

The Fed's key interest rate is at a still-low range of 1% to 1.25% after two quarter-point rate hikes this year, in March and June.

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Drone footage reveals the devastation wrought by the deadly Tubbs fire in Santa Rosa. An astounding number of women have shared stories of alleged sexual misconduct by producer Harvey Weinstein. A USC administrator has left his post in the wake of allegations that he sexually harassed female colleagues. President Trump has nominated Kirstjen Nielsen, a top aide to Chief of Staff John F. Kelly, to head the Department of Homeland Security.

Credits: Associated Press, Travis Geske, Getty, KTLA

Drone footage reveals the devastation wrought by the deadly Tubbs fire in Santa Rosa. An astounding number of women have shared stories of alleged sexual misconduct by producer Harvey Weinstein. A USC administrator has left his post in the wake of allegations that he sexually harassed female colleagues. President Trump has nominated Kirstjen Nielsen, a top aide to Chief of Staff John F. Kelly, to head the Department of Homeland Security.

Credits: Associated Press, Travis Geske, Getty, KTLA

federal-reserve-grapples-with-mystery-of-persistently-low-inflation photo 2 CAPTION

Drone footage reveals the devastation wrought by the deadly Tubbs fire in Santa Rosa. An astounding number of women have shared stories of alleged sexual misconduct by producer Harvey Weinstein. A USC administrator has left his post in the wake of allegations that he sexually harassed female colleagues. President Trump has nominated Kirstjen Nielsen, a top aide to Chief of Staff John F. Kelly, to head the Department of Homeland Security.

Credits: Associated Press, Travis Geske, Getty, KTLA

Drone footage reveals the devastation wrought by the deadly Tubbs fire in Santa Rosa. An astounding number of women have shared stories of alleged sexual misconduct by producer Harvey Weinstein. A USC administrator has left his post in the wake of allegations that he sexually harassed female colleagues. President Trump has nominated Kirstjen Nielsen, a top aide to Chief of Staff John F. Kelly, to head the Department of Homeland Security.

Credits: Associated Press, Travis Geske, Getty, KTLA

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Over 160,000 acres have been destroyed in northern California fires.

Over 160,000 acres have been destroyed in northern California fires.

federal-reserve-grapples-with-mystery-of-persistently-low-inflation photo 4 CAPTION

The death toll from the Northern California fires has reached 17. A wounded Mandalay Bay security guard warned hotel officials about a gunman before the Las Vegas massacre. Harvey Weinstein is facing more sexual assault and harassment allegations. The FBI’s investigation into bribery and corruption in college basketball continues to expand. 

The death toll from the Northern California fires has reached 17. A wounded Mandalay Bay security guard warned hotel officials about a gunman before the Las Vegas massacre. Harvey Weinstein is facing more sexual assault and harassment allegations. The FBI’s investigation into bribery and corruption in college basketball continues to expand. 

federal-reserve-grapples-with-mystery-of-persistently-low-inflation photo 5 CAPTION

A Northern California firestorm is one of the worst in state history, officials say. The Dodgers are heading to the NLCS after beating the Diamondbacks Monday night. Police have dramatically changed their account of how the Las Vegas massacre began. The Los Angeles Times has named a new editor in chief. 

A Northern California firestorm is one of the worst in state history, officials say. The Dodgers are heading to the NLCS after beating the Diamondbacks Monday night. Police have dramatically changed their account of how the Las Vegas massacre began. The Los Angeles Times has named a new editor in chief. 

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A wind-fed wildfire surged over the Anaheim Hills on Monday, burning several homes and forcing thousands to evacuate as fire crews struggled to battle the rapidly growing blaze.

A wind-fed wildfire surged over the Anaheim Hills on Monday, burning several homes and forcing thousands to evacuate as fire crews struggled to battle the rapidly growing blaze.


UPDATES:

2:55 p.m.: This article was updated throughout with additional details from the Fed meeting minutes.

This article was originally published at 11:20 a.m.

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Article Federal Reserve grapples with mystery of persistently low inflation compiled by www.latimes.com