The Federal Reserve “wants more inflation” as it seeks a sustained recovery for an economy possibly nearing stall speed, said Vincent Reinhart, chief U.S. economist at Morgan Stanley.
“We have a real risk that the economy is slowing to a stall speed as we get into really uncertain times about fiscal policy,” Reinhart said in a television interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen.
The Federal Open Market Committee last month announced a third round of asset purchases and extended its horizon for near-zero interest rates at least through the middle of 2015. The Fed is buying $40 billion of mortgage-backed securities a month to boost housing and fuel growth and employment.
Consumer prices increased 1.7 percent in the 12 months ended in August, the Labor Department said. The Fed has set a target of 2 percent inflation.
“The bottom line is the Federal Reserve wants more inflation,” Reinhart said in the Bloomberg interview. “They said they are going to keep policy accommodative essentially past the inflection point, until the recovery is sustained.”
The five-year, five-year forward break-even rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after Fed policy makers announced its third round of quantitative easing. That was up half a percentage point from July 26.
“Last time I checked, we’re in expansion,” Reinhart said. “So if you describe what the United States is right now as in recovery, you must really think we’re very far behind the curve.”
Reinhart, a former monetary affairs director at the Fed, called the central bank’s lack of specifics on its goals for inflation and unemployment a “collective action problem.”
“Individual FOMC participants are litigating the issue in public,” said Reinhart. “They each individually think a rule would be best but because they differ on the dual mandate, maximum employment and stable prices, they can’t agree on an individual rule.”
Yesterday, the Fed released minutes of its Sept. 12-13 meeting, which reported policy makers said they could change the size of the central bank’s monthly bond purchases to reduce risks possibly associated with the program, including higher inflation. The report also showed that a few FOMC participants expressed “skepticism” about whether the bond-buying program could help.
The unemployment rate in the U.S. unexpectedly fell to 7.8 percent in September, Labor Department figures showed today in Washington. The economy added 114,000 workers last month. The median estimate of 92 economists surveyed by Bloomberg called for an advance of 115,000.