All talk, few answers from FOMC for Yellen’s long inflation miss

Bloomberg

Janet Yellen’s Federal Reserve probably didn’t make much progress last month toward resolving the biggest topic of debate during her tenure leading the central bank: low
inflation. Minutes of the US central bank’s December 12-13 policy-setting Federal Open Market Committee gathering will probably show the outlook for consumer prices continued to dominate the discus-
sion when they are published on Wednesday in Washington.
A review of the closed-door debates at FOMC meetings since Yellen took over as Fed chair in 2014 shows the number of mentions of “inflation” in November surged to 84, the most of her tenure.
The latest minutes also should help explain why the forecast for three interest-rate hikes next year penciled in by Fed officials was unchanged from previous projections in September, despite an upgrade to their outlook for economic growth.
In her final press conference on Dec. 13, the Fed chair cited below-target inflation as the one thing left on her “undone list.” She added that “most of my colleagues and I do
believe that it’s being held down by transitory factors, but there’s work undone there in the sense we
need to see it move up in line with our objective” after spending most of the past decade below the FOMC’s
2 percent goal.
That will be a task for Fed Governor Jerome Powell, nominated to replace Yellen when her term as chair ends Feb. 3. He’s heard the discussion escalate first-hand.
Fed staff economists who present at each FOMC meeting marked down their projections for inflation in 2018, “reflecting the judgment that a bit of the unexplained weakness in core inflation this year may carry over into next year,” according to the minutes of the November gathering. Yellen’s comments following the December meeting didn’t indicate much progress.
“There could be a rethink of inflation,” she said during the press conference. “I think it is important to watch inflation outcomes carefully, and if we do not see inflation moving in the manner that the committee anticipates, to alter policy so that we do achieve our 2 percent objective, but at the moment, most of my colleagues and I believe we are on track to achieve it.”
“Fed officials only expect a relatively short-term fiscal stimulus, and do not see a longer-term change in the economy’s ‘speed limit.’ As a result, the hawks are not likely to be placated by some notion of capital deepening preventing a more material pickup in inflation as GDP growth exceeds its potential rate .”— Carl Riccadonna, chief US economist, Bloomberg Economics
After rising almost to 2 percent at the end of 2016, so-called core inflation — a widely followed measure that excludes volatile food and energy prices — fell unexpectedly in 2017, despite a decline in the unemployment rate to near a 17-year low.
A November 27 study by San Francisco Fed researchers split the core inflation gauge up into two categories: “procyclical” inflation, which historically has risen as the unemployment rate has fallen, and “acyclical” inflation, which hasn’t typically responded to tighter labour markets in the past.