The Federal Reserve seems as though it may accept fault for its wrongful assessment on the inflation rate.
Towards the end of August, Federal governor Lael Brainard stated during an assessment at the central bank that the long-standing low inflation rate is the result of transitory factors that will eventually not be in place. Due to this, policymakers should reconsider how they will deal with future rate hikes.
Brainard stated that “I am concerned that the recent low readings for inflation may be driven by depressed underlying inflation, which would imply a more persistent shortfall in inflation from our objective. In that case it would be prudent to raise the federal funds rate more gradually.”
The comments are important to the current situation because Brainard is considered to be close on the idealogical scale to Federal Chair Janet Yellen who in her own right has stated that the end of the rate-hike cycle could be close. The two have stood by their prediction that inflation will ultimately reach the 2% target.
After the speech in late August, their prediction was challenged. Brainard pointed out the low unemployment rate of 4.4% and used it to compare the “full employment” rate from 2004 to 2007. During that earlier time period, the rate of inflation was around 2.2%. Currently, the three-year average inflation rate is 1.5%.
Brainard stated that there are several factors that are bringing inflation levels down but again stood by her theory that they are transitory. Brainard named a few key factors such as a drop in cellphone rates, as well as a rise in the cost of prescription drugs, but remains that these are temporary.
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She further stated that “What is troubling is five straight years in which inflation fell short of our target despite a sharp improvement in resource utilization. Households and firms have experienced a prolonged period of inflation below our objective, and that may be affecting their perception of underlying inflation,” Brainard said. “In short, frequent or extended periods of low inflation run the risk of pulling down private-sector inflation expectations.”
Time will tell what happens to the federal rate hikes in regard to inflation.