Monday, November 25, 2019

Fed Chair Powell: "Building on the Gains from the Long Expansion"

by Calculated Risk on 11/25/2019 07:14:00 PM

From Fed Chair Jerome Powell: Building on the Gains from the Long Expansion Excerpt on inflation:

For many years as the economy recovered from the Great Recession, inflation averaged around 1.5 percent—below our 2 percent objective. We had long expected that inflation would gradually rise as the expansion continued, and, as I noted, both overall and core inflation ran at rates consistent with our goal for much of 2018. But this year, inflation is again running below 2 percent.

It is reasonable to ask why inflation running somewhat below 2 percent is a big deal. We have heard a lot about inflation at our Fed Listens events. People are concerned about the rising cost of medical care, of housing, and of college, but nobody seems to be complaining about overall inflation running below 2 percent. Even central bankers are not concerned about any particular minor fluctuation in inflation.

Around the world, however, we have seen that inflation running persistently below target can lead to an unhealthy dynamic in which inflation expectations drift down, pulling actual inflation further down. Lower inflation can, in turn, pull interest rates to ever-lower levels. The experience of Japan, and now the euro area, suggests that this dynamic is very difficult to reverse, and once under way, it can make it harder for a central bank to support its economy by further lowering interest rates. That is why it is essential that we at the Fed use our tools to make sure that we do not permit an unhealthy downward drift in inflation expectations and inflation. We are strongly committed to symmetrically and sustainably achieving our 2 percent inflation objective so that in making long-term plans, households and businesses can reasonably expect 2 percent inflation over time.