November 20, 2014 / 9:55 PM / 4 years ago

COLUMN-Fed inflation goal and the 'coming years' mirage: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

Nov 20 (Reuters) - The Federal Reserve’s 2 percent inflation objective feels more and more like an aspiration or, maybe, like steadily rising middle-class wages, a nostalgic anachronism.

Policy-makers noted in the minutes from their October meeting that inflation not only continues to run below the Fed’s longer-run goal but that some markets show investors demanding less inflation insurance as time passes.

Yet the Fed chooses to reassure us with the following statements:

“Many participants observed the committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations. Some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.”

Well, yes, growth faltering, as it seems to be doing elsewhere in the world, and may do in the U.S., would make that whole inflation issue a bit more sticky.

But it gets better, because the Fed has not just a goal in mind, but a time frame. Check this out:

“Participants anticipated that inflation would be held down over the near term by the decline in energy prices and other factors, but would move towards the Committee’s 2 percent goal in coming years.”

In “coming years”. Lots of things may come to pass in “coming years”. Jet packs and the Cubs winning the World Series, to name just two.

So I’ll give the Fed credit and agree that yes, we will some day return to normal inflation. What seems a lot less clear is when, and through what mechanism, exactly.

After all, a minority of FOMC participants, what the Fed calls “a few,” were warning that inflation might stay below the objective for “quite some time,” another delightfully vague and contractually meaningless time frame.

And note that the Fed was meeting before the release of the latest Thomson Reuters/University of Michigan survey which showed consumers have the lowest long-term (five-to-10-year) inflation expectations since the tail end of the recession in March 2009, at 2.6 percent this month, down 0.2 percentage point in a month.

Now let’s put this in a bit of context. This is not simply the result of falling energy prices, and thus likely to come out in the wash in coming years. Inflation as the Fed best measures it has been below target for two and a half years and is only 1.4 percent.


And remember too that we’ve had six years of extraordinary monetary policy, the vast majority of which is still in place subsequent to the taper of bond buying. While many are called out, rightly, for warning that QE would cause inflation which never came, the fact that so little did persist raises uncomfortable questions.

All of this non-inflation is happening with job growth actually in quite peppy territory. Unemployment is only 5.8 percent for the first time in six years and the economy keeps creating 200,000-plus jobs per month.

So how exactly the Fed will manage to raise rates “in coming years,” presuming we won’t see a hike in December, remains unclear. Not only did the minutes show sensitivity to low inflation, but also to the rather minor turmoil seen recently in financial markets. If that scares them, just wait until risk investors actually think we might see a hike within a current bonus cycle.

So, as it has been for a while, the Fed will play for time.

“In light of uncertainties over the inflation outlook, the FOMC was concerned to convey in the language of the post-meeting statement that any decision regarding the timing of the first increase in the federal funds target range would be data-dependent,” Stephen Lewis, Chief Economist at ADM Investor Services in London, wrote in a note to clients.

Any ideas as to how they get to a place where they might hike? “One member,” unnamed but possibly Minneapolis Fed President and dove Narayana Kocherlakota, made noises about stronger forward guidance to undergird the inflation target, according to the minutes.

Why exactly that would work when all the rest hasn’t is left up to us, imagination-dependent, as it were.

None of this is to say that the U.S. is Japan, trapped by a declining population in a recessionary and deflationary future.

One can only imagine what our economy would look like if we had a similar attitude to immigration as does Japan.

But it is reasonable to ask if there are forces at work, probably global and quite possibly featuring the debt load, which make the current suite of policy tools ill-suited to the tasks on which they are being used.

Monetary policy, in other words, is easy to enact, unlike fiscal policy. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at (Editing by James Dalgleish)

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