The Federal Reserve has already achieved one of its two mandates: With the unemployment rate at just 4.4 percent, the Fed has essentially maximized employment.
It’s the Fed’s other goal—price stability—that’s stayed persistently out of reach. Inflation has been edging further below the Fed’s 2 percent target. Problem is, too-low inflation tends to slow consumer spending, the U.S. economy’s main fuel. Many consumers delay purchases if they think the same price—or a lower one—will be available later.
Low inflation will likely be a key discussion point when the Fed holds its latest policy meeting this week. The central bank has raised its benchmark interest rate twice this year, but no one expects another hike when its meeting ends Wednesday. And unless inflation picks up, some analysts foresee no further rate increase this year.
Fed Chair Janet Yellen deepened the uncertainty earlier this month when she sounded less sure about her position that a slowdown in inflation this year was due to temporary factors. Yellen conceded that Fed officials were puzzled by recent developments. Her remarks lifted financial markets as investors interpreted her words to suggest that the Fed might slow its pace of rate increases.
“In the past, Yellen was pretty confident that inflation would come back, but that is now in doubt,” said Sung Won Sohn, economics professor at California State University-Channel Islands.
Over the past 12 months, the inflation gauge the Fed monitors most closely has risen just 1.4 percent, according to the latest data. That’s down from a 1.9 percent year-over-year increase in January. In part, it’s why some economists say they suspect the Fed may be keeping its rate increases on hold, waiting to see if inflation in coming months rebounds from its current slowdown.
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