The minutes of the December 16-17 Federal Open Market Committee meeting offer some hope that the Fed is finally getting over its seven-plus years’ worry that the U.S. runs the risk of falling into a deflationary spiral, similar to what we encountered during the Great Depression of the 1930s.
While deflation, or even disinflation, might be a legitimate concern now in Japan and the Euro Zone, the idea that we face a similar threat seems a little hard to swallow. Perhaps this was a real concern during the panicky days of the global financial meltdown in 2008, but even then it seemed to be a stretch. Now, seven years later, it just looks ridiculous.
According to the minutes of the December meeting, released last week, the Fed’s monetary policy committee brushed off the idea that inflation would remain below the Fed’s 2% target due to the declining price of oil, which it calls “transitory,” and remaining slack in the labor market.
“Participants generally anticipated that inflation would rise gradually toward the Committee's 2% objective as the labor market improved further and the transitory effects of lower energy prices and other factors dissipated,” the minutes state. “Inflation was projected to reach the Committee's objective over time, with longer-run inflation expectations assumed to remain stable, prices of energy and non-oil imports forecast to begin rising next year, and slack in labor and product markets anticipated to diminish slowly.”
Yet, the minutes show, a number of FOMC members still see a risk that inflation “could run persistently below their 2% objective, with some expressing concern that such an outcome could undermine the credibility of the Committee's commitment to that objective. Some participants were worried that the recent substantial fall in energy prices could lead to a reduction in longer-term inflation expectations, while others were concerned that the decline in market-based measures of inflation compensation might reflect, in part, that such a decline had already begun.”
Of all the things about Fed policy I just don’t get, its take on inflation – rather, its fixation on raising it – is by far the most perplexing. So it’s hard to understand what these “some participants” worried about too-low inflation are looking at – or even what country they’re living in.
Until the Fed started to tell us differently a few years ago, inflation has always been a dirty word. Inflation, no matter how low, was always bad. Most consumers view it that way; they always have, and rightfully so.
Indeed, when Congress amended the Federal Reserve Act in 1977, giving it a dual mandate to promote maximum sustainable employment and “price stability,” the latter was generally interpreted to mean low inflation. The amendment was enacted in response to the high inflation – then in the low teens – during the Nixon and Ford Administrations of the mid-1970s.
Now, since the debacle of 2008, the Fed has been telling us that inflation is simply too low, and we must do something about it. I’m not a trained economist, but I don’t feel I need to be one to know that makes no sense.
The argument that we somehow have to fear too-low inflation sounds eerily similar to recent worries that low oil prices are bad for the economy. That idea is just as hard to swallow.
Sure low oil prices are a problem if you’re in the energy business or live in an OPEC country, but for the vast majority of Americans low oil prices are a net positive, and a big one. As the recent issue of Bloomberg Businessweek notes, only about 2% of the economy comes from capital spending by the energy sector, “a drop in the bucket” of GDP, which, by contrast, is comprised of close to 70% consumer spending.
Normally, governments create inflation by simply doing what governments usually do, meaning they spend money they don’t have. With Washington spending as much money as it has the past seven or so years and the Fed helping by buying up a good portion of government debt, we should be grateful that inflation is so low. (But don’t count on it lasting; we’ll have plenty to worry about soon enough).
Just as big a problem is how the Fed defines and measures inflation. Exactly what numbers is it looking at to determine that inflation is as low as it claims?
The median U.S. household income is now pretty much where it was more than 25 years ago. Can we say the same about prices?
While gasoline prices have certainly come down recently and many other consumer goods have held steady, other things Americans spend most of their incomes on have gone through the roof, like state and local taxes and fees, higher education, health care and medical insurance, just to name a few. (It’s not a coincidence that they’re all government-mandated or -related costs). Doesn’t the Fed include any of those things in its inflation metrics? Or don’t these count?
The last thing we have to worry about is that inflation is too low, and it’s good to see that the Fed, or at least a majority of its members, is finally getting around to seeing that. Inflation will take care of itself, possibly sooner rather than later. Then the Fed will have a different battle to fight.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.