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Yellen’s first challenge: Coping with danger of too-low inflation
By Korea HeraldPublished : Jan. 27, 2014 - 19:43
One of Janet Yellen’s first challenges as Federal Reserve chairman is generating enough inflation to meet the central bank’s target of 2 percent.
Policy makers have failed to attain their goal for almost two years and now are paring the pace of their bond buying. Inflation rose at a 0.9 percent rate for the 12 months ending in November, according to the central bank’s preferred measure. The last time prices were climbing at or above 2 percent was in April 2012.
“Every month that passes with inflation stuck below the target, the pressure to come up with a plan to deal with it grows,” said Ethan Harris, co-head of global economics research at Bank of American Corp. in New York. “They are slowly acknowledging that this is a serious risk.”
Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a Jan. 7 speech that too-low inflation can be “a cause for real concern” because it increases the possibility a “negative shock” to the economy may lead to deflation. That could cause households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up. Too-low inflation also means higher inflation-adjusted interest rates, making it harder to achieve a sufficient pace of growth.
“Furthermore, persistently low inflation can theoretically undermine the credibility of the central bank,” said Rosengren, who dissented against the December decision to cut monthly bond buying by $10 billion. If the Fed announces a goal “but is unable to achieve that target in a reasonable time frame, some may call into question its ability to do so in the medium- or long-term as well.”
Officials justified their Dec. 18 decision to cut monthly asset purchases to $75 billion by citing improvement in the job market, convincing investors the taper didn’t constitute a tightening of policy by also extending the timeline for zero interest rates.
Yellen, who won Senate approval this month to succeed Ben S. Bernanke as chairman on Feb. 1, will need to reinforce that rate commitment to ward off the threat of disinflation, according to Harris, a former New York Fed researcher.
“She’s going to have to step up and pretty clearly clarify to the markets” how she’s “going to deal with low inflation,” he said. “It slows down the whole exit, both in terms of the speed of tapering and timing of the first rate hike.” (Bloomberg)
Policy makers have failed to attain their goal for almost two years and now are paring the pace of their bond buying. Inflation rose at a 0.9 percent rate for the 12 months ending in November, according to the central bank’s preferred measure. The last time prices were climbing at or above 2 percent was in April 2012.
“Every month that passes with inflation stuck below the target, the pressure to come up with a plan to deal with it grows,” said Ethan Harris, co-head of global economics research at Bank of American Corp. in New York. “They are slowly acknowledging that this is a serious risk.”
Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a Jan. 7 speech that too-low inflation can be “a cause for real concern” because it increases the possibility a “negative shock” to the economy may lead to deflation. That could cause households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up. Too-low inflation also means higher inflation-adjusted interest rates, making it harder to achieve a sufficient pace of growth.
“Furthermore, persistently low inflation can theoretically undermine the credibility of the central bank,” said Rosengren, who dissented against the December decision to cut monthly bond buying by $10 billion. If the Fed announces a goal “but is unable to achieve that target in a reasonable time frame, some may call into question its ability to do so in the medium- or long-term as well.”
Officials justified their Dec. 18 decision to cut monthly asset purchases to $75 billion by citing improvement in the job market, convincing investors the taper didn’t constitute a tightening of policy by also extending the timeline for zero interest rates.
Yellen, who won Senate approval this month to succeed Ben S. Bernanke as chairman on Feb. 1, will need to reinforce that rate commitment to ward off the threat of disinflation, according to Harris, a former New York Fed researcher.
“She’s going to have to step up and pretty clearly clarify to the markets” how she’s “going to deal with low inflation,” he said. “It slows down the whole exit, both in terms of the speed of tapering and timing of the first rate hike.” (Bloomberg)
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Articles by Korea Herald
