CHICAGO Jan 19 Inflation is unlikely to be a
problem as long as U.S. unemployment remains elevated,
according to economists from the San Francisco Federal Reserve
In the San Francisco Fed's latest Economic Letter released
on Tuesday, economists found high joblessness has helped subdue
inflation since the recession began in late 2007, bolstering
the case for an employment-inflation link that some policy
"Our findings suggest that the high level of the
unemployment rate over the past year likely contributed to the
substantial declines in the inflation rate," economists Zheng
Liu and Glenn Rudebusch said.
While inflation and unemployment don't "line up" well in
milder recessions, they have moved together during the current
deep downturn, the economists said.
The Fed slashed benchmark overnight interest rates to near
zero percent in December 2008 and has said it will keep rates
low for an extended period to boost economic recovery.
A central element of debate with the Fed's rate-setting
committee is whether a decline in the national jobless rate,
now at 10 percent, would need to be seen before changing the
stance on rates. Evidence of a strong link between high
unemployment and low inflation could bolster some policy
makers' arguments for keeping interest rates low for a longer
San Francisco Fed President Janet Yellen, who does not have
a vote on the U.S. central bank's policy-setting Federal Open
Market Committee this year, is considered one of the more
"dovish" officials seen as leaning toward not raising rates.
While many officials share the view that inflation is
unlikely to ignite until unemployment recedes, some worry that
the more than $1 trillion the central bank has pumped into the
economy could spark inflation before then.
The San Francisco Fed economists said their findings should
be interpreted with caution and that inflation could rise even
before the jobless rate comes down.
"Other factors determine inflation beside the unemployment
gap," they said. "For example, supply shocks and commodity
price increases can push inflation up."
That's what happened in the 1970s, the economists said,
adding that had been an "important and painful lesson."
Expectations on inflation can also be a key driver of
actual inflation, they said.
But those expectations remain low, despite the expanded
size of the central bank's balance sheet, since the Fed's
commitment to maintaining price stability is seen by market
participants as credible, the economists said.
Maintaining the Fed's independence is crucial to keeping
that credibility, they added.