The lowest inflation since the brink of the Kennedy-era economic boom in the 1960s is buying time for Federal Reserve Chairman Ben S. Bernanke to press on with the central bank’s $85 billion in monthly bond purchases.
A gauge of consumer prices excluding food and energy that is watched by the Fed rose 1.1 percent in the year through April, matching the smallest gain since records started in 1960. With inflation below the Fed’s 2 percent long-run goal and the jobless rate at 7.6 percent, the Fed is falling short of its mandate to ensure stable prices and maximum employment.
Policy makers wrapping up a meeting today will probably pledge to plow ahead with record bond buying, setting aside for now concern that growth in the Fed’s $3.41 trillion in assets may stoke long-term inflation expectations or disrupt market functioning, said Drew Matus, a former economist at the Federal Reserve Bank of New York.
“Why would they possibly rush to a taper now?” said Matus, an economist at UBS AG in Stamford, Connecticut. “Unemployment is still nowhere near what they consider to be the natural rate, and the inflation number is too low.”
The Federal Open Market Committee plans to release a statement at 2 p.m. after a two-day meeting in Washington, and Bernanke is scheduled to hold a press conference at 2:30 p.m. The central bank will also release FOMC participants’ forecasts for employment, growth, inflation and interest rates.
Stocks fell after a two-day rally in the Standard & Poor’s 500 Index as investors awaited the outcome of the Fed meeting for signs about when it plans to scale back stimulus measures. The S&P 500 dropped 0.1 percent to 1,650.38 at 10:50 a.m. in New York.
In Japan, Prime Minister Shinzo Abe’s reflation campaign gained ground as the nation’s exports rose more than forecast last month, with the weaker yen boosting the value of overseas sales. The value of shipments abroad increased 10 percent in May from a year earlier, the most since 2010 and exceeding the 6.4 percent median estimate in a Bloomberg survey of economists, a Finance Ministry report showed in Tokyo.
The Fed will probably wait to taper bond buying until its Oct. 29-30 meeting, when it will cut its monthly purchases to $65 billion, according to the median estimate in June 4-5 Bloomberg survey of 59 economists. By then, inflation will be rising toward the Fed’s target, accelerating to 1.3 percent in the third quarter and 1.5 percent in the fourth quarter, according to economists’ estimates.
“The low level of inflation gives them the room to do things on their own terms and do it relatively slowly, which seems to be an approach that they favor right now,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Richmond Fed researcher.
Inflation will eventually speed up as long as the economy keeps growing, as newly hired workers stoke demand and support prices, said Nathan Sheets, the global head of international economics at Citigroup Inc. Unemployment will probably fall by the fourth quarter to 7.4 percent, according to a survey of 83 economists.
“The economy is on the cusp of picking up,” said Sheets, former head of the Fed’s international finance division. “If we get the recovery in the labor market, inflation is likely to follow.”
Fed spokesman David Skidmore didn’t respond to voice mail messages requesting comment.
Policy makers have debated this year when to begin winding down bond purchases known as quantitative easing. The Fed announced $40 billion in monthly purchases of mortgage backed securities in September and added $45 billion of Treasury purchases in December. At the current pace, the Fed’s balance sheet will hit $4 trillion by year-end.
The FOMC has bought bonds to halt disinflation before, announcing in November 2010 a round of purchases of Treasury securities totaling $600 billion and aimed partly at averting a broad decline in prices.
Prices as measured by the personal consumption expenditures index haven’t fallen to the level in April since the period before an expansion that started in 1961 under President John F. Kennedy, according to the Commerce Department’s Bureau of Economic Analysis.
Investor expectations for inflation have also declined. The spread between nominal Treasuries and inflation-protected securities over the next 10 years has narrowed to 2.09 percentage points from as high as 2.59 points in March.
St. Louis Fed President James Bullard said last week he wants “to see some reassurance” from inflation data “before we start to taper our asset purchase program.”
Other Fed officials see disinflation as less of a threat. William C. Dudley, president of the New York Fed, said in a May 23 interview that “inflation expectations are still well-anchored” and “are higher than the current rate of inflation, and so that’ll tend to pull inflation back upwards a little bit.”
Fed officials failed to foresee that inflation would fall so low. In September 2012, when they started $40 billion in monthly purchases of mortgage bonds, they predicted core inflation would climb 1.7 percent to 1.9 percent that year. Inflation finished 2012 at 1.4 percent.
In December, Fed officials forecast core inflation this year would climb 1.6 percent to 1.9 percent. So far, the measure has risen 1.1 percent from a year earlier. Including food and energy, the personal consumption expenditures index, or PCE, in April climbed just 0.7 percent over 12 months.
A separate gauge of inflation, the consumer price index, climbed 1.4 percent in May from a year earlier, the Labor Department reported yesterday.
The gauge rose 0.1 percent in May from the month before after falling 0.4 percent in April. The median forecast of 82 economists surveyed by Bloomberg called for an increase of 0.2 percent in May. The first drop in the cost of food in almost four years helped hold back prices.
Wal-Mart Stores Inc., the world’s largest retailer, has cut prices on groceries and other necessities as the Bentonville, Arkansas-based chain’s lower-income shoppers pull back amid higher unemployment and increased Social Security taxes.
“We see some growth in beef and produce pricing, but that’s offset in our businesses by dry grocery, that’s flat to slightly deflating in certain areas,” Bill Simon, chief executive officer of the company’s U.S. operations, told analysts on a June 7 conference call. “We don’t expect those to change.”