Fed Vice Chair sees hints of too-low inflation moving up

AP News
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Posted: Mar 07, 2016 4:48 PM
Fed Vice Chair sees hints of too-low inflation moving up

WASHINGTON (AP) — Federal Reserve Vice Chairman Stanley Fischer said Monday that inflation in the U.S. may be starting to tick up from too-low levels, a key condition for further interest rate hikes.

"We may well at present be seeing the first stirrings of an increase in the inflation rate — something that we would like to happen," he said in a speech in Washington.

However, another Fed official, Lael Brainard, expressed uncertainty about whether an improving job market would be enough to bolster inflation, given persistently low oil prices and a strong dollar. Inflation has "persistently underperformed" relative to the Fed's target of annual price gains of 2 percent, she said in a separate speech Monday.

The two Fed officials' views underscore how the Fed is wrestling with a prolonged period of muted price gains and its timetable for rate hikes. In December, the Fed raised its key rate from record lows.

Policymakers did not raise rates at its January meeting, and officials are expected to leave rates unchanged when they meet again on March 15-16. Many analysts don't expect another rate hike until June at the earliest.

During a question and answer session, Fischer noted that prices were being dragged by tumbling energy prices and a strong dollar, which reduces the cost of imports. But he expects those factors to fade soon, enabling inflation to advance toward the Fed's target.

"I think when the dollar stabilizes and oil stabilizes, we will see inflation going very close to 2 percent," Fischer said in his appearance to receive a lifetime achievement award from the National Association for Business Economics.

Fischer was also asked about the possibility that a weak U.S. economy might force the Fed to reverse course or even introduce negative interest rates, like central banks have done in Europe and Japan.

He said the Fed was studying negative interest rates, but he doubts that it would decide to use them.

"We would prefer not to go there," Fischer said. "We don't see any immediate need for that, but we are certainly watching the situation."

Inflation by the Fed's preferred measure has been running below target for more than four years. It had risen just 0.7 percent over the 12 months ending in December. In January however, this measure of inflation jumped, rising 1.3 percent over the past 12 months. Core inflation, which excludes food and energy, rose 1.7 percent.

The Fed has pegged 2 percent as a target for inflation because it believes that price gains at this level are low enough to promote price stability — one of its dual mandates. A target below that level risks pushing the country into a period of deflation, or falling prices, if there is an unexpected shock to growth. Deflation, which the United States has not seen since the Great Depression, is viewed as destabilizing because it is a sign of an extremely weak economy.

In her speech and a later interview, Brainard said she remained concerned about low inflation. She acknowledged the rise in January prices, but she said she wants to see more data.

"I want to see a pattern, some persistence," she said on CNBC.

In his speech, Fischer expressed deep concerns about the slowdown in U.S. productivity over the last two decades — a trend that has held down worker pay.

Fischer said "there are few issues more important for the future of our economy" than boosting productivity, the amount of output per hour of work.

Productivity grew at a solid 3 percent from 1952 to 1973, then slowed to 2.1 percent from 1974 to 2007, he said. From 2008 to 2015, productivity growth in the United States fell to an average rate of just 1.2 percent.

Fischer said this retreat will likely have "severe consequences" on the nation. But economists are unsure of why the slowdown has occurred or what will happen to productivity in the future.