Tags: Inflation | Guiding Light | Fed | Rate Rise

Inflation Now Guiding Light on Fed's No-Hurry Rate Rise Path

Image: Inflation Now Guiding Light on Fed's No-Hurry Rate Rise Path

Wednesday, 06 Jan 2016 05:35 PM

Federal Reserve policy makers dwelled on inflation performance at their December meeting, minutes of the gathering showed, in a sign price pressures will play a larger role in setting the pace of interest rate increases this year.

“The Fed’s focus is now really on inflation,” said Donald Ellenberger, a senior portfolio manager who oversees about $10 billion of client money at Pittsburgh-based Federated Investors Inc. “That’s going to be the real focus for the markets going forward.”

Minutes of the Dec. 15-16 meeting of the Federal Open Market Committee, at which policy makers raised interest-rates for the first time since 2006, were released Wednesday in Washington. A large part of the debate revolved around downside risks to inflation, even though officials said they were "reasonably confident" they’d reach their goal over the medium term.

The U.S. central bank has missed its 2 percent inflation target for more than three years as a slumping oil and commodity and a stronger dollar have kept a lid on prices. The personal consumption expenditures price index, minus food and energy, rose just 1.3 percent for the 12 months ending November. The Fed bases its target on the full index, which rose 0.4 percent in November.

Dovish Wing

While the majority of the committee continued to bank on a forecast that sees inflation rising to their goal by 2018, the minutes contained several warnings from a group of more dovish officials who did not share this confidence.

“For some members, the risks attending their inflation forecasts remained considerable,” the minutes said. “Among those risks was the possibility that additional downward shocks to prices of oil and other commodities or a sustained rise in the exchange value of the dollar could delay or diminish the expected upturn in inflation.”

Global Dis-inflation

Even further strength in the labor market, where the 5 percent jobless rate is almost at Fed officials’ definition of full employment, “might not prove sufficient to offset the downward pressures from global dis-inflationary forces,” a couple of officials worried.

The FOMC summed up its strategy for future rate hikes in a single word: gradual. However, for the near term outlook that word can mean many things — such as two additional hikes this year or four.

Michael Gapen, chief U.S. economist at Barclays Capital Inc., says the inflation data will determine the pace and that means three hikes this year starting in March.

By June, however, they will see that import prices are suppressing core inflation measures, forcing them to revise their outlook, and skip a hike at that meeting, he said. They will raise again in September and December, Gapen said in an interview.

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Federal Reserve policy makers dwelled on inflation performance at their December meeting, minutes of the gathering showed, in a sign price pressures will play a larger role in setting the pace of interest rate increases this year.
Inflation, Guiding Light, Fed, Rate Rise
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2016-35-06
Wednesday, 06 Jan 2016 05:35 PM
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