June 16, 2017

IT'S A DEFLATIONARY EPOCH:

Weak inflation erodes conviction at Fed on rate hikes (Ann Saphir and Lindsay Dunsmuir, 6/16/17, Reuters)

When the Federal Reserve raised rates earlier this week, Fed Chair Janet Yellen expressed confidence that recent weak inflation readings were transitory. Fed officials on Friday signaled that doubts are simmering.

In an interview with Reuters on Friday, Minneapolis Federal Reserve President Neel Kashkari said he was not alone at the U.S. central bank in his view the Fed should have waited to raise interest rates until it was sure the recent drop in price pressures really is temporary. [...]

"The run of weaker core inflation readings has clearly rattled some Fed officials," Capital Economics wrote in a note to clients earlier on Friday.

The U.S. unemployment rate fell to a 16-year low of 4.3 percent in May, but the Fed's preferred measure of underlying inflation has been running below target for more than five years and in April slowed a second month to 1.5 percent.

That has led to some beginning to question the validity of the traditional narrative of a tight labor market eventually sparking higher inflation.

"Recent global developments add doubt to whether the traditional dynamics still work," Barclays economist Christian Keller said on Friday. He cited the examples of Japan and Germany, whose unemployment levels have declined to levels not seen since the early 1990s but where wage pressures also remain sluggish.

The four most recent downturns have all been caused by the Fed hiking rates into the teeth of deflation, though only the one where hikes revealed institutional fraud produced a recession.

Posted by at June 16, 2017 4:38 PM

  

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