Fed Officials Debated Signaling Too-Low Inflation Concerns

Federal Reserve officials groped for ways to communicate their dissatisfaction with too-low inflation as they prepared to alter their guidance for the likely future path of interest rates at their March meeting.

“A few participants proposed adding new language in which the committee would indicate its willingness to keep rates low if projected inflation remained persistently below the committee’s 2 percent longer-run objective,” according to minutes of their March 18-19 meeting released today. That would involve including a “quantitative element” in the Fed’s statement, the minutes showed.

Fed officials at the meeting moved away from such quantitative guideposts, dropping language that tied an increase in their benchmark interest rate to a specific level of unemployment. Instead, they said they would consider a “wide range of information,” including measures of labor-market conditions, inflation pressures and financial conditions.

Efforts to name a minimum acceptable level of prices to “demonstrate the committee’s commitment to defend its inflation objective from below as well as from above” weren’t supported by “most officials,” the minutes said.

“They do feel a sense of urgency” on inflation, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “You have to come back constantly to the question of whether they have the tools to get inflation higher. It is not at all clear that a central bank can move inflation in fractions of percentage points.”

Kocherlakota Dissent

Minneapolis Fed President Narayana Kocherlakota dissented at the March meeting because the new forward guidance “would weaken the credibility” of the Fed’s commitment to its inflation goal by “failing to communicate purposeful steps to more rapidly increase inflation to the 2 percent target.”

Moderate wage growth and ample slack in industrial capacity and labor markets has undercut the ability of firms to raise prices.

A gauge of inflation watched by the Fed showed prices rose 0.9 percent for the 12 months ending February, less than half the Fed’s 2 percent goal.

The personal consumption expenditures price index, which measures how much consumers pay for goods such as clothing, cars, and furniture as well as services, has been running below 2 percent for almost two years.

Fed officials last month saw staff projections indicating that inflation would stay below their target “over the next few years.”

The minutes showed that “a couple” of participants suggested that too-low inflation “raised questions” about whether the FOMC was providing enough stimulus.

Still, “most” expected prices to return to the 2 percent goal “over the next few years.” Their economic projections in March showed the PCE price index in a range of 1.7 percent to 2 percent by 2016.

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