Inflation, the economy-crushing ogre that still haunts the forecasts of many economists and policymakers, has been kept on a short leash for decades. Yes, rents and the prices of some food items have risen in recent months, but inflation overall remains below the Federal Reserve’s targeted 2 percent annual rate.
Still, many economists and Fed watchers have been warning for years that the monster could soon be stirring, and their cries have become more urgent as inflation has edged higher. The time has come, they insist, for Janet Yellen and her colleagues on the Federal Open Market Committee to yank the chain by moving interest rates higher in order to ensure that the beast doesn’t get out of control.
The Fed on Wednesday rejected that idea, at least for now. Despite some reports and speculation that it might back away from its pledge to keep interest rates low for a “considerable time” after the end of its bond-buying stimulus program next month, the FOMC kept that language intact in its policy statement and again warned that “there remains significant underutilization of labor resources.”
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In other words, even though the unemployment rate has fallen to 6.1 percent, the job market still needs help in its recovery and the Fed is more concerned about getting the millions of unemployed and underemployed Americans back to work than it is about the threat of spiking inflation. The updated economic projections of Fed board members and bank presidents released Wednesday showed that the central bankers still expect inflation to remain below their target rate of 2 percent, or at that level, through 2017.
The newest data on inflation, released Wednesday, support the decision to hold off. The Consumer Price Index calculated by the Bureau of Labor Statistics unexpectedly fell 0.2 percent in August — the first decline since April 2013 — leaving overall inflation at 1.7 percent over the last 12 months, down from 1.9 percent as of July. Excluding food and falling energy prices, inflation was flat last month.
At the same time, the new Fed forecasts included lowered estimates of economic growth for this year and next — the 2015 outlook for GDP growth fell to a range of 2.6 percent to 3 percent from a previous 3 percent to 3.2 percent — even as they also forecast that the unemployment rate would be a tick lower than in previous projections. That also could reinforce the notion that the Fed has room to keep rates low without risk that the economy will overheat.
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“There are still too many people who want jobs but cannot find them, too many who are working part-time but would prefer full-time work and too many who are not searching for a job but would be if the labor market were stronger,” Yellen said at her Wednesday afternoon press conference.