WASHINGTON — Federal Reserve officials are hunting for new tactics to raise price increases to their target as slowing global growth, cheaper commodities and flat wages sound warnings that inflation is descending toward the danger zone.
The Fed needs a clear strategy for getting the inflation rate higher after falling short of its 2 percent target for 28 consecutive months.
Now, as longer-run inflation expectations erode in financial markets, the Federal Open Market Committee is shifting its focus toward prices after putting its main emphasis on jobs for months. Several officials worried that “inflation might persist below” the committee’s target for “quite some time,” minutes from the Sept. 16-17 meeting said.
Too-low inflation “is getting to be a real issue again,” said former Fed Governor Laurence Meyer. With inflation at 1.5 percent according to the Fed’s preferred index, Meyer said FOMC policymakers aren’t likely to raise interest rates, even if the economy approaches full employment, defined as a jobless rate of 5.2 percent to 5.5 percent. Unemployment was 5.9 percent last month.
“The timing of the first rate hike is all about inflation,” said Meyer, now a senior managing director at Macroeconomic Advisers in Washington.
Policymakers, including regional Fed Presidents William Dudley of New York, Charles Evans of Chicago and Narayana Kocherlakota of Minneapolis, have in recent days all mentioned below-target inflation as a risk that weighs against raising interest rates too soon.
An inflation rate approaching zero is bad for the economy because of its impact on behavior by businesses and consumers. Companies’ inability to raise prices hurts profits, and they rarely compensate by cutting wages, so they fire workers instead. Consumers anticipating falling prices may postpone discretionary purchases. This can combine to create a vicious circle of less spending and further downward pressure on prices.
Prices fell 1.2 percent for the 12 months ending in July 2009, when the economy had just exited the recession, according to the inflation measure the Fed uses, the personal consumption expenditures price index.
Unemployment that month was 9.5 percent. Since Fed officials first published their inflation target in January 2012, the index has averaged 1.5 percent.
“It is a reflection of a lousy recovery,” said Adam Posen, a former member of the Bank of England’s Monetary Policy Committee who now leads the Peterson Institute for International Economics in Washington.
“As we are seeing in the euro area, and as we saw in Japan, if you let it go on for too long, it becomes a lock-in, it reinforces a bad outcome,” he said.
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