Three Fed Presidents Say Disinflation May Prompt Easing
Three regional Federal Reserve bank presidents said a further decline in U.S. inflation below the Fed’s 2 percent goal may signal a need for more accommodation.
“If inflation looked like it was going to sag further on a persistent basis, I would certainly consider stimulus for the purpose of bringing inflation up to target,” Richmond Fed President Jeffrey Lacker said today, adding he doesn’t see an imminent disinflation risk. Minneapolis Fed President Narayana Kocherlakota today called for guarding the inflation target “from below,” while James Bullard of St. Louis said yesterday, “we should defend the inflation target from the low side.”
Policy makers are expressing concern over disinflation even as some officials, including Lacker, advocate curtailing easing by slowing the Fed’s $85 billion monthly pace of bond buying. Consumer prices rose 1.3 percent in February from a year earlier, matching the lowest level since October 2009, according to the Fed’s preferred gauge of inflation.
“The Fed is missing its dual mandate on both sides -- unemployment is too high, and inflation is too low,” said Josh Feinman, the New York-based global chief economist for DB Advisors, the Deutsche Bank AG asset manager.
“This simply makes it more likely the Fed will stick with the program for a while, and talk of scaling back sales this summer is diminishing, partly because of the inflation data,” said Feinman, a former Fed senior economist in Washington.
Inflation expectations over the next five years, as measured by the spread between Treasury Inflation Protected Securities and nominal bonds, fell below 2 percent today for the first time since November. Over the next 10 years, investors expect 2.3 percent annual inflation, down from 2.6 percent in March.
The slump in gold prices may also signal that investors are folding long-held bets that monetary stimulus will ultimately unleash inflation. The spot price of gold fell to a closing price of $1,347.95 an ounce on April 15 and was at $1,392.68 at 1:33 p.m. in New York. That leaves the price of the metal 27 percent below its 2011 peak.
“The risks are weighted to the downside rather than upside” for inflation, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York and a former Richmond Fed economist. “If concern about deflation increases, it is possible they could start to increase asset purchases.”
The Fed said yesterday in its Beige Book economic survey that price increases in the U.S. were “mostly subdued” outside of residential construction, with most of the central bank’s 12 districts showing “minimal” price pressures. Last month, the Federal Open Market Committee said inflation was “somewhat below” its goal.
The central bank started a second round of asset purchases, or quantitative easing, in 2010 amid concern about deflation risk. Bullard, warning of a Japan-style fall in prices, called on the Fed to buy Treasury notes in a paper entitled “Seven Faces of the Peril.”
The Fed may need to step up stimulus to avert continued disinflation, Bullard said yesterday to reporters after a speech in New York.
“If it doesn’t start to turn around here soon, I think we’ll have to rethink where we are in our policy,” he said.
The FOMC in March reaffirmed plans to buy bonds at the current pace until the labor market outlook improves “substantially.” It also pledged to keep interest rates near zero as long as unemployment is above 6.5 percent and inflation doesn’t exceed 2.5 percent. Unemployment in March was 7.6 percent.
It’s “very important to protect the target” for inflation when prices rise or fall too much, Kocherlakota said to reporters today in New York. A further drop in inflation would make him “even more” supportive of additional accommodation to spur growth, he said.
Kocherlakota has called on the Fed to increase stimulus by pledging not to consider raising the benchmark interest rate from zero until unemployment declines to 5.5 percent.
In an April 16 speech, Kocherlakota predicted inflation pressures will “remain subdued” while advocating “a more accommodative monetary policy that puts more upward pressure on prices.”
Lacker said today the threat from disinflation is limited.
“With the state of the economy and price and wage trends what they are, I don’t see a material risk now of the rate of inflation falling substantially further,” Lacker said to reporters at a conference in Charlotte, North Carolina.
“I’d of course be giving serious thought to providing monetary stimulus” should disinflation continue, Lacker said, while reiterating his view that the Fed should slow or end its bond buying.
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