Tim Duy, Columnist

Fed Should Hold Fast in Face of Looser Financial Conditions

Policy makers will resist pulling back on rate projections if they can justify holding their inflation forecast and unemployment remains poised to decline.

June 13, 2017 at 11:30 AM UTC

Updated on

June 13, 2017 at 11:31 AM UTC

By Tim Duy

Tim Duy is a professor of practice and senior director of the Oregon Economic Forum at the University of Oregon and the author of Tim Duy's Fed Watch.

Fed prepares to raise interest rates again.
Photographer: Aaron P. Bernstein

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The recent inflation data doesn't exactly support the Federal Reserve’s monetary tightening plans. Chair Janet Yellen and her colleagues will surely take note of the weakness at this week’s Federal Open Market Committee meeting, but they will downplay any such concerns as transitory. At the moment, low unemployment remains the focus. Add to that loosening financial conditions and you get a central bank that is more likely than not to stay the course on its plan to hike interest rates.

FOMC participants will follow the logic of San Francisco Federal Reserve Bank President John Williams and attribute recent inflation trends to “special factors,” notably the decline in cellular service prices as measured by the Bureau of Labor Statistics. With this explanation in hand, they will hold firm to their medium term projections that anticipate inflation will soon return to target. The stability of those forecasts is more important for the anticipated course of policy than recent inflation deviations.