With inflation elusive, two Fed policymakers lay out a welcome mat
By Ann Saphir and Howard Schneider
SANTA BARBARA, Calif./WASHINGTON, May 16 (Reuters) - Worried
that current low inflation expectations will sap the U.S.
central bank's ability to combat a future downturn, two Federal
Reserve officials on Thursday made an unusual pitch: if
inflation rises unexpectedly, the Fed should lay out the welcome
"It might take some surprise, that maybe wage growth all of
a sudden does pick up, and then that leads to high inflation,"
Minneapolis Fed President Neel Kashkari told reporters after a
talk at an economic symposium put on by the University of
California, Santa Barbara. "And then, importantly, we shouldn’t
respond very much."
Speaking in Washington, Fed Governor Lael Brainard floated a
similar approach, telling members of the National Tax
Association that if prices rise, because of higher import costs,
for example, the Fed could take advantage of the situation by
encouraging an "opportunistic reflation," and "communicate that
a mild overshooting of inflation is consistent with our goal."
Fighting inflation has long been a bedrock principle of
global central banking. Under standard economic thinking,
unemployment below a certain level helps boost income and wages,
leading to higher inflation.
But with inflation running stubbornly below the Fed's 2%
target despite unemployment at a 50-year low of 3.6%, Fed
officials are beginning to rethink the view that a stronger
labor market inevitably pushes inflation uncomfortably higher.
The remarks on Thursday from Brainard and Kashkari signal an
appetite for the Fed to remain unmoved, possibly for years, in
the face of upward price increases.
Fed officials are undertaking a year-long effort to see if
they can find better strategies for meeting their inflation
target and addressing the weakened relationship between low
unemployment and price increases.
Notably, neither Brainard nor Kashkari called for cutting
interest rates to try to boost inflation, as U.S. President
Donald Trump has urged and traders of short-term interest rates
are betting the Fed will need to do before the end of the year.
Inflation by the Fed's preferred gauge is running at 1.6%,
well below its 2% target.
But both floated the idea that if inflation does surge
unexpectedly, the Fed should make the most of it.
While Kashkari leaned on the possibility that pay rises
could generate an unexpected and welcome surge in inflation,
Brainard pointed to the possibility of higher import costs.
Many economists have said that newly increased U.S. tariffs
on Chinese goods, imposed by Trump as part of a bid to force
trade concessions from the world's second-largest economy, could
lead to higher prices for U.S. consumers.
Walmart Inc warned of exactly that on
The central bank in December wrapped up three years of rate
hikes with a ninth quarter-of-a-percentage-point increase that
brought the Fed's target range for short-term rates to
2.25%-2.5%, and policymakers have since signaled they will keep
rates there for the rest of the year.
(Reporting by Ann Saphir and Howard Schneider; Editing by
© 2019 Thomson Reuters. All rights reserved. Reuters content is the intellectual property of Thomson Reuters or its third party content providers. Any copying, republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters shall not be liable for any errors or delays in content, or for any actions taken in reliance thereon. "Reuters" and the Reuters Logo are trademarks of Thomson Reuters and its affiliated companies.