Federal Reserve Chair Jerome Powell doubtless spoke for the “many” when he said at the press conference ending the monetary policy meeting earlier this month that policymakers believe inflation will return to the central bank’s 2% target over time. But there is much in the minutes of that meeting that belie his confidence inflation will hit that target anytime soon.
Markets were little moved as the minutes of that meeting of the Federal Open Market Committee, released on Wednesday after the usual three-week lag, confirmed Powell’s comments. However, the minutes also show that “some” participants expressed concern “that long-term inflation expectations could be below levels consistent with the committee’s 2% target or at risk of falling below that level.” Policymakers believe that expectations go a long way to determining actual inflation.
In its economic outlook, the Fed said core inflation, as measured by the personal consumption expenditure index leaving out food and energy, was expected “to move up in the near term but nevertheless to run just below 2% over the medium term.”
Hard to know how Powell and many participants square that with a belief that only transitory factors are keeping inflation down. For good measure, the minutes continue with the staff forecast saying total PCE price inflation would run below core inflation in 2020 and 2021 due to low energy prices – that is, well below the 2% target.
But is three years really transitory? Especially when it’s coming on top of several years of inflation below 2%, always for various transitory reasons. “Several” participants actually had something to say about that, according to the minutes. They commented:
“that if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the committee’s symmetric 2% objective.”
Such a development would make it more difficult to achieve the 2% inflation target on a sustainable basis over the longer run — and that is why fed funds futures are showing a better than even probability that the Fed will cut rates before the end of this year and not even wait for inflation to continue low through the two following years.
The FOMC minutes did say that “a few” participants worried that inflation pressures could build quite quickly and firm action might be needed if the economy developed as they thought. However “a few other participants” thought the subdued inflation coupled with wage gains in line with productivity growth might indicate that resource utilization was not as high as record low unemployment rates might lead one to believe.
This is a bit more than the lower prices for apparel and portfolio management that Powell proffered as transitory factors in keeping core inflation low. Nonetheless, the Fed policymakers generally were willing to accept the anomalous data as an excuse to practice their mantra of patience.
James Bullard, the head of the Federal Reserve Bank of St. Louis and something of a maverick on the FOMC, did suggest on Wednesday that the Fed may have to cut rates even if the economy was doing well just to preserve its credibility on inflation.
This option might become more attractive if inflation refuses to budge in coming months, said Bullard, who is a voting member of the panel this year. (The members of the Fed board of governors are permanent voting members, as is the head of the New York Fed, while the remaining 11 regional bank chiefs rotate into a voting position every two or three years.)
Reference to the Fed’s “symmetric” 2% target, which by now has become rote, has done little to boost that credibility. The idea is that the Fed would tolerate an inflation rate slightly above 2% for some time just as it has put up with it running below the target.
The symmetric ploy was originally designed to set inflation expectations a little higher, but 2% still remains a ceiling. It’s hard to imagine the Fed would tolerate inflation above 2% for as long as it has the shortfall, so the whole exercise has done little to enhance credibility. Rather the opposite.