Federal Reserve: Weak Inflation a Worry

Summary

WSJ Your Money Briefing

Episode: Federal Reserve: Weak Inflation a Worry
Date: November 23, 2017
Host: Charlie Turner
Guest: Harriet Torrey, Wall Street Journal Reporter

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Episode Overview

In this episode, host Charlie Turner speaks with Harriet Torrey about the Federal Reserve’s latest meeting and the growing concern among Fed officials around stubbornly weak inflation, despite a strengthening economy and robust labor market. The conversation highlights the uncertainty in monetary policy and what it could mean for future interest rate decisions, especially as leadership at the Fed transitions to Jerome Powell.

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Key Discussion Points & Insights

The Fed’s Persistent Inflation Worries

• Despite earlier expectations, inflation remains below the Fed's 2% annual target.
• Initially, officials viewed the low inflation as “transitory,” tied to specific price drops (e.g., wireless plans), but there is increasing doubt about whether these factors are actually temporary.
  • [01:18] Harriet Torrey:

    “For most of this year, inflation has been below target, but Fed officials were attributing it to transitory factors … but now they're saying actually those transitory factors might not be as transitory as we've thought. There could be something more persistent going on.”

• Even with rising wages and a strong job market, inflation remains stubbornly low, puzzling Fed officials.

Re-Evaluating Economic Theory

• The longstanding connection between a tight labor market and rising inflation is being questioned.
  • [02:32] Harriet Torrey:

    “That's something that came up in the minutes, that the response of inflation to what they call resource utilization could be weaker than it has been in the past.”

• Some officials suggest that structural changes in the labor market or delayed effects could be the cause; others worry inflation might suddenly “break out” and warrant higher rates.

Current Inflation Figures

• Fed’s preferred measure (PCE) is at 1.6% as of September, with core PCE (excluding food and energy) at 1.3%.
• Both measures remain a “long way off” from the 2% goal.
  • [03:37] Harriet Torrey:

    “So still quite a long way off from 2%. And the Fed has also been saying the inflation target is symmetric, which suggests that they'd be happy for it to go over 2%. But really it hasn't shown much sign that it's doing that.”

Path for Rate Increases

• The market is overwhelmingly expecting a rate hike in December (“100%” certainty according to recent market data).
• However, weak inflation may slow the pace of increases after that.
  • [04:45] Harriet Torrey:

    “When the Fed last met in September, they pencilled in one further rate increase for 2017 and three for 2018. So at the moment they're looking at three next year … it’ll be interesting to see how those projections pan out…”

Fed Leadership Change: Enter Jerome Powell

• Janet Yellen is expected to be succeeded by Jerome Powell, the Trump administration’s nominee.
• Powell’s views generally align with Yellen's; he is seen as dovish and is likely to continue a cautious approach to raising rates.
  • [05:24] Harriet Torrey:

    “He's seen as someone who has very similar views to Janet Yellen. It's hard to know exactly what he thinks, though, because … he has tended to sort of take the consensus line.”

Where Rates Stand

• The current Federal Funds rate is between 1% and 1.25%; last raised in June 2017.
  • [05:50] Harriet Torrey:

    “The Fed funds rate is at a range, it's between 1 1/4%. And the Fed last raised rates in June, so it's been there for a while now. And market expectations for a quarter percentage point increase in December … are at 100%.”

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Notable Quotes & Memorable Moments

• [01:18] Harriet Torrey, on new concerns:

  “There could be something more persistent going on.”

• [02:32] Harriet Torrey, questioning old assumptions:

  “The response of inflation to what they call resource utilization could be weaker than it has been in the past.”

• [05:48] Charlie Turner, on 100% certainty in markets:

  “I don't think I've ever seen market expectations at 100% before myself.”

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Important Timestamps

• [00:41] – Introduction of episode theme and context for the discussion
• [01:18] – Harriet Torrey explains shifting views on “transitory” inflation
• [02:32] – Discussion on the possible disconnect between employment and inflation
• [03:37] – Current inflation figures
• [04:45] – Projections for future rate hikes and upcoming Fed leadership change
• [05:50] – Current Federal Funds rate and December rate hike expectations
• [06:19] – Episode wrap-up and guest sign-off

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Summary

This episode delves into the Federal Reserve’s struggle with persistently low inflation, which defies traditional predictions given the US economy’s strength and full employment. The conversation covers why Fed officials are concerned, potential reasons for this shift in inflation behavior, and the uncertainty this creates for future interest rate policy—especially with a new Fed Chair taking the helm. Markets are certain of at least one imminent rate hike, but the pace in 2018 could be in flux as officials try to figure out what’s holding inflation back.

Transcript

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[Charlie Turner]

Welcome to YOUR Money Matters. I'm Charlie Turner in New York. At their last policy meeting on October 31 and November 1, Fed officials said they'd likely raise short term interest rates in the near term because of a strengthening economy. But the meeting minutes released Wednesday indicated that some members of the panel were worried about persistently weak infl. Get some more details from Wall Street Journal reporter Harriet Tory, who joins us from Washington. Harriet, hasn't the Fed predicted that inflation would hit the central bank's annual target of 2% and now there are worries that it could stay below that level for longer than anyone had expected?

[Harriet Tory]

Yeah. So this is the, this is the new aspects that we saw in the minutes is that Fed officials are starting to say now that they so for most of this year, inflation has, has been below target, but Fed officials were attributing it to transitory factors like price Dr. In certain categories, for instance, wireless plans for mobile phones. But now they're saying actually those transitory factors might not be as transitory as we've thought and there could be something more persistent going on. And we got a bit of a preview of this concern when Janet Yellen was speaking in New York. She, she did mention that she and her colleagues are not certain that it's transitory and that they're monitoring inflation very closely. And what we saw in the minutes sort of reinforces that. And the Fed is really not sure at all why inflation hasn't been picking up. And it's been weak for several years now. But in previous is there seem to be a very concrete reason, like for instance, the dollar appreciated very strongly, oil prices were right down, import prices were down. Now we have a strengthening economy, the labor market is doing really well, and yet inflation is still persistently below target. And there's a lot of head scratching going on as to why that might be.

[Charlie Turner]

Might they be coming around to the realization that there is probably a disconnect between a strong labor market and inflation.

[Harriet Tory]

That is one thing that they've Been discussing that. That's something that came up in the minutes, that the, that the respons of inflation to what they call resource utilization could be, could be weaker than it has been in the past. I mean another thing that they mentioned is that it could just be that the, the tight labor market is taking longer to sort of show through in the inflation data. So on the one hand we have these concerns about inflation, weak inflation being persistent. On the other hand there are certain Fed officials saying, you know, this inflation could break out at any, any moment and that's why we need higher rates, is because, you know, inflation could suddenly, could sudden. So it's interesting, it seems that there are quite a few theories sort of doing the rounds. You know, perhaps there's more slack in the labor market than we thought. So. But yeah, it's just ongoing concerns about low inflation.

[Charlie Turner]

I'm speaking with Harriet Tory of the Wall Street Journal and you're listening to youo Money Matters. Thanks for listening everyone. Harriet, what annual level is inflation at right now?

[Harriet Tory]

So the Fed's preferred measure of inflation is PC measure and that was 1.6% in September. And then core PC, which is the number that you have when you strip out volatile prices for food and energy, was only 1.3% which might have had something to do with the, with the hurricanes that happened in the, in the late summer. So still quite a long way off from 2%. And the Fed has also been saying the inflation target is symmetric, which suggests that they'd be happy for it to go over 2%. But really it hasn't shown much sign that it's, that it's doing that. So this is the big thing in the minutes. The market's expectations for a rate increase in December have been extremely high for, for quite a long time now. And the mention that a short term rate increase would be warranted in the near term appeared to sort of confirm that about December and about the immediate, the immediate path of rates. But these constant worries about inflation do raise some questions about how, how quickly the Fed will raise rates next year.

[Charlie Turner]

Absolutely. I was going to ask you that because it seems like they would have to adjust their timetable in the face of persistently weak infl.

[Harriet Tory]

Quite possibly. When the Fed last met in September, they pencilled in one further rate increase for 2017 and three for 2018. So at the moment they're looking at three next year. And at the December meeting they will again submit forecasts. So it'll be interesting to see how those projections pan out, whether they come down or they stay the same. It's worth noting, of course, that the Fed will. After February, it's likely that the Fed will have Jerome Powell as its leader. He's Trump's nominee to succeed Janet Yellen. So there are lots of changes coming up at the Fed next year for sure.

[Charlie Turner]

And he's supposed to be a dove as well, similar to Janet Yellen, so he would not tend to be more aggressive as far as raising rates.

[Harriet Tory]

So Jerome Powell in his speeches has largely stayed very close to the consensus view at the Fed for the whole time that he's been there. And so he is seen as someone who has very similar views to Janet Yellen. It's hard to know exactly what he thinks, though, because as I said in his speeches, he has tended to sort of take the consensus line. So it'll be interesting to see how things pan out once he's in the chairman's seat.

[Charlie Turner]

The Fed funds rate. Sit right now, Harriet.

[Harriet Tory]

The Fed funds rate is at a range, it's between 1 1/4%. And the Fed last raised rates in June, so it's been there for a while now. And market expectations for a quarter percentage point increase in December are currently at, when I last checked, just, just before, just before this, we're at 100%. So markets see at least one rate increase by December and the meeting is only three weeks away now, so very, very high. I don't think I've ever seen market expectations at 100% before myself.

[Charlie Turner]

WAL. Wall Street Journal reporter Harriet Torrey joining us from Washington. Thanks, Harriet.

[Harriet Tory]

Thank you.

[Charlie Turner]

And that's your Money Matters. I'm Charlie Turner at the Wall Street Journal.

[Narrator/Announcer]

Is Alexa part of your life then make your Money Matters part of your

[Harriet Tory]

flash briefing on the Amazon Echo, the Wall Street Journal.

[Small Business Owner 1]

Listen, ambitiously, access to affordable credit helps me pay my employees, but I don't really need it.

[Small Business Owner 2]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner 1]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Small Business Owner 2]

they need while increasing megastore profits. They deserve it, don't they?

[Narrator/Announcer]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.