Federal Reserve Chair Janet Yellen acknowledged Tuesday that the Fed is puzzled by the persistence of unusually low inflation and that it might have to adjust the timing of its interest rate policies accordingly.
Speaking to a conference of economists, Yellen touched upon key questions the Fed is confronting as it tries to determine why inflation has remained chronically below its inflation target of 2 percent annually. The Fed chair said officials still expect the forces keeping inflation low to fade eventually. But she conceded that the Fed may need to adjust its assumptions.
In noting the persistence of low inflation, Yellen suggested that the Fed will take care not to raise rates too quickly. But she also said the central bank should avoid raising rates too slowly. Moving too gradually, she suggested, might eventually force the Fed to have to accelerate rate hikes and thereby elevate the risk of a recession.
Most analysts expect the central bank to raise rates in December, for a third time this year, in a reflection of economic improvement. But the Fed has said its rate hikes will depend on incoming data.
In her speech in Cleveland to the annual conference of the National Association for Business Economics, Yellen went further than she has before in suggesting that the Fed could be mistaken in the assumptions it is making about inflation.
“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective or even the fundamental forces driving inflation,” Yellen said.
The Fed seeks to control interest rates to promote maximum employment and stable prices, which it defines as annual price increases of 2 percent. While the Fed has met its goal on employment, with the jobless rate at 4.4 percent, near a 16-year low, it has continued to miss its inflation target.
Chronically low inflation can depress economic growth because consumers typically delay purchases when they think prices will stay the same or even decline.
Inflation, which was nearing the 2 percent goal at the start of the year, has since then fallen further behind and is now rising at an annual rate of just 1.4 percent.
Yellen has previously attributed the miss on inflation this year to temporary factors, including a price war among mobile phone companies. She and other Fed officials have predicted that inflation would soon begin rising toward the Fed’s 2 percent inflation…