Fed, Perplexed by Low Inflation, Is Still Ready to Raise Rates


The Federal Reserve is poised to raise its benchmark interest rate next week, at its final meeting of the year, as the economy continues to gain strength and the unemployment rate continues to fall.

But it’s not a straightforward decision.

The problem is inflation. Prices continue to rise more slowly than the Fed regards as healthy. This year is on a pace to be the sixth straight with inflation below the Fed’s 2 percent target, a sign of continuing economic weakness. It also limits the Fed’s ability to reduce borrowing costs during a future economic downturn.

This will be a key issue for the Fed board and, in particular, its next chairman to wrestle with. On Tuesday, Jerome H. Powell, President Trump’s nominee to lead the Fed, moved closer to taking the top spot when the Senate Banking Committee approved his nomination, 22 to 1. His confirmation now moves to the full Senate for a vote, which has not yet been scheduled.

Most Fed officials, including Mr. Powell, a current member of the board, are ready to move on rates. While they don’t completely understand why inflation is low, they are confident that it will rise as the economy continues to grow — as employers seeking workers are forced to offer higher wages.

Other Fed officials want to wait to raise rates, saying they see evidence that the economy still needs help from the central bank. The Fed’s benchmark rate is in a range between 1 percent and 1.25 percent, and they would like to keep it there until inflation gained strength.

The New York Times spoke with a pair of Fed officials, one on each side of the issue. The interviews were conducted last week; officials are not allowed to comment publicly on monetary policy in the week before a meeting of the Federal Open Market Committee.

Charles L. Evans, president of the Federal Reserve Bank of Chicago: I’ve been looking at the data, and the data have not been strongly indicating that we should continue with a rate increase. I do worry that inflation expectations have not yet moved up in a noticeable way that I think is on the path to being more consistent with 2 percent. I’m going to be listening to everybody, but I don’t think that the call is obvious at this point.

Robert S. Kaplan, president of the Federal Reserve Bank of Dallas: Whether we’re at full employment, we’ll know in hindsight, but I believe we’re going to continue to take slack out of the labor market. I’m very aware that we’re undershooting inflation, but my team believes we’re going to get to 2 percent in the medium term. It may be slower and more uneven than people expect, but from a risk management point of view, I think it would be wise to take the next step. I’m being very careful in the way I’m saying it because I continue to believe that removal of accommodation should be done in a gradual and patient way.

Mr. Kaplan: I am a strong believer that cyclical pressures are building and, as we continue to take slack out of the labor market, they’ll continue to build. The issue is, there’s a headwind in terms of inflation: technology-enabled disruption. What do I mean? Yes, of course, technology is replacing people, and that has been going on for a long time. Increasingly, though, consumers have more use of technology to shop for goods and services at lower prices — that’s accelerating. And a third thing is the emergence of new models for selling goods, manufacturing goods or distributing goods.

The obvious ones you think of are Uber vs. taxis, Amazon vs. retail, Airbnb vs. hotels. But every business is facing disruption. What we’re finding is increasingly businesses lack pricing power. Even since I’ve been sitting in this seat, I talk to maybe 30 C.E.O.s a month, and some businesses that had pricing power two years ago are now telling me stories that they’re in the middle of a price war.

Mr. Evans: One of the things that make me nervous is that longer-term inflation expectations have moved down over the last few years. I think that makes it more challenging to get inflation up to 2 percent. I think everybody is mindful that you don’t want inflation to get out of hand. Having said that, we’ve now gotten to the point where low inflation as an objective is extremely credible. We’ve gained a lot of credibility, and I don’t think markets or the public are expecting central bankers to let inflation get out of hand. I think we’ve got a bit of a reverse problem. We haven’t demonstrated with our actions that 2 percent isn’t a ceiling.

Mr. Evans: Any economist is going to ask, “Well, did you offer to pay more to get people to take those jobs?” And there’s usually a smile, but that’s not the first, second or third thought that comes to mind. They go out and recruit a little more heavily. There’s an assumption that maybe there are some people on the sidelines who can come in. I’m not really sure that’s the case. They have been coming in over the last two years and that’s been helpful, but that slack has largely been reduced. It does seem as if we keep on pushing on demand, they might push up wages and we might get more inflation. That was the case in the ’70s.

Mr. Kaplan: So companies are replacing people with technology. Older workers are getting bought out, and the work force is getting younger. And you’ve got to segment this by educational attainment. If you’ve got a college education and you’re in a high-skilled job, I actually think you’ve got pretty good negotiating capability for wages. If you’ve got a high school education or less, what I’ve been seeing — and this is more anecdotal, and we need to be doing more research on this — it is highly likely that your job is either getting restructured or eliminated and you don’t have the educational background to easily move, unless you get retrained, which is an easy thing to say but a very hard thing to do.

Mr. Kaplan: If we could call a timeout right now and ask if you see imbalances, I’ve said that they’re manageable right now. But I do know that it pays to monitor these things very carefully at this stage in the cycle. All I’m pointing out is that we need to be on our toes. I don’t see overheating, but I think as we continue to take slack out of the labor market, we could well see imbalances build.

Mr. Evans: I do take seriously that if we have overly accommodative policy — even in an attempt to get inflation up to our objective — then we’re somehow providing the means for the financial sector to lever up a bit, particularly if we don’t have the right prudential standards in place. It just seems to me that it would be much better if we used our other tools, supervision, that would allow our monetary policy tools to address our inflation and employment goals.



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