Despite a low unemployment rate, inflation slowed this year, confounding central bankers who set in motion a tightening cycle on the expectation of firming prices. This leaves the Federal Reserve stuck in a quandary. Either transitory factors restrain inflation only temporarily, or perhaps expectations sink below the Fed’s 2 percent target.
If the former, the central bank can continue along the current path of gradual rate hikes. The majority of monetary policy makers lean in this direction. But if the latter, sticking to the current plan risks excessive slowing and even recession. It is the type of policy mistake we should fear in the mature stages of a business cycle.
New York Federal Reserve President William Dudley recently reiterated the consensus view among policy makers: