CORALVILLE, Iowa Jan 15 The low rate of U.S.
inflation is "both puzzling and worrisome," a top Federal
Reserve official said on Wednesday, and is reason enough to keep
interest rates low for some time to come even if the labor
market outlook continues to brighten.
In a nod to an improving jobless rate, which ticked down to
6.7 percent in December, the Fed this month reduced its massive
bond-buying program to $75 billion a month from $85 billion a
month and said it would probably phase the program out entirely
late in the year.
Chicago Federal Reserve President Charles Evans warned that
the current level of 6.7 percent unemployment is still well
above the "normal" unemployment rate of 5.25 percent.
And, he said in remarks prepared for delivery to a business
group for the greater Iowa City region, "This decision does not,
however, mean we thought the economy needed less overall policy
Instead, he said, the decision to reduce the bond-buying
program was merely a shifting of the mix of policy tools, with
the Fed relying less on so-called quantitative easing and more
on forward guidance, telling markets what to expect in terms of
Fed rate policy.
Specifically, the Fed said it would keep rates near zero
until "well past the time" that unemployment falls to 6.5
percent, especially if inflation continues to linger below the
Fed's 2-percent target. Inflation, by the Fed's preferred gauge,
has risen just 1.1 percent in the past 12 months.
"This elaboration of our forward guidance should more
strongly communicate that we are in no hurry to raise rates: We
will not prematurely reduce accommodation in an economy with
elevated unemployment and very low inflation pressures," he said
"Importantly, in my mind, the low readings for inflation by
themselves now suggest that it likely will be appropriate to
keep the funds rate at its current level for quite some time."
With growth expected to rise to just 2.75 percent this
year, in his view, and unemployment to fall to 6 percent or "a
bit lower" by the end of 2015, the Fed "must continue to be
willing to use (its) tools to put us on a clear track back to
full employment and inflation averaging our 2 percent target."
Low inflation, he said, is particularly troublesome, because
without the lift of rising prices debt becomes more burdensome
than expected and the economy slows. Even with the Fed's
super-easy monetary policy, he forecast inflation to rise only
slowly, approaching 1.5 percent by the end of next year.
"Very low inflation in an environment of rebounding growth
and highly accommodative monetary policy continues to be both
puzzling and worrisome," Evans said.