Fed May Have Misjudged Low Inflation

Fed May Have Misjudged Low Inflation

Fed May Have Misjudged Low Inflation


  • Expect President Trump to fill the Fed vacancies with pro-growth advocates. Econ 101, No inflation, No growth.

Tuesday, the expected outgoing Federal Reserve Chairwoman Janet Yellen acknowledged that the central bank is puzzled by the persistence of unusually low inflation and that it might have to adjust the timing of its interest rate policies accordingly.

Ms. Yellen, speaking to a conference of economists touched Key questions the Fed is confronting as it tries to determine why inflation has remained chronically below its inflation target of 2% annually. She said officials still expect the forces keeping inflation low to fade eventually. But she conceded that the Fed may need to adjust its assumptions.

Most analysts expect the central bank to raise rates in December, for a 3rd time this year, in a reflection of the economy’s improvement. But the Fed has said its rate hikes will depend on incoming data.

“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective or even the fundamental forces driving inflation,” Ms. Yellen said.

Chronically low inflation can depress economic growth because consumers typically delay purchases when they think prices will stay the same or even decline.

Inflation, which was nearing the 2% goal at the start of the year, has since then fallen further behind and is now rising at an annual rate of just 1.4%.

In her remarks Tuesday, Ms. Yellen said this outcome of a rebound in inflation is still likely. But she said the central bank needed to remain alert to the possibility that other forces not clearly understood might continue to keep inflation lower than the Fed’s 2% goal.

She said in the face of “significant uncertainties,” she believed the Fed’s best course was to move gradually in adjusting its benchmark interest rate. Yellen said that the Fed needed to balance the risk of raising rates too quickly against the risk of raising rates too slowly.

“It would be imprudent to keep monetary policy on hold until inflation is back to 2%,” Ms. Yellen said.

Last week, the Fed said the reductions in its bond holdings would begin in October by initially allowing a modest $10-B in maturing bonds to roll off the $4.5-T balance sheet each month.

The size of the monthly reductions will be increased by $10-B each Quarter until they reach $50-B a month a year from now. The balance sheet is expected to remain just under $3-T for 2 years from now, still far higher than the $900-B mark in effect before the financial crisis of 2007-2008.

Ms. Yellen’s term expires on 3 February 2018. Vice Chairman Stanley Fischer has said he will leave the Fed next month.

In addition, there are 2 other Fed governor vacancies that need to be filled. Randal Quarles, a Treasury official during the George W. Bush administration, was approved by the Senate Banking Committee earlier this month to occupy a 3rd opening, though his pick still needs confirmation by the full Senate.

Expect President Trump to fill the Fed vacancies with pro-growth advocates. Econ 101, no inflation, no growth.

Tuesday, the US major stock market indexes finished at: DJIA -11.77 at 22284.32, NAS Comp +9.57 at 6380.16, S&P 500 +0.18 at 2496.84

Volume: Trade on the NYSE came in light to moderate at: 738-M/shares exchanged.

  • NAS Comp +18.5% YTD
  • DJIA +12.8% YTD
  • S&P 500 +11.5% YTD
  • Russell 2000 +7.4% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.44) Very Bullish (0.53) Bullish (0.33) Bullish (0.46)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bullish (0.31) Bullish (0.26) Bullish (0.33) Bullish (0.33)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Neutral (0.20) Bullish (0.30) Neutral (-0.06) Bullish (0.36)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bearish (-0.43) Bearish (-0.27) Bearish (-0.35) Very Bearish (-0.67)

Stay tuned…

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