Is inflation really the issue? Fed officials say no

When the Federal Reserve heard President Donald Trump give his tax plan a thumbs-up, the Treasury secretary loudly said in front of Congress that the “focus is shifting to tax reform.”

But throughout its last meeting, officials were still worried about the potential for inflation.

Now, with the Fed having lifted interest rates earlier this month for the third time in six months, some Fed watchers have called on Mr. Trump to shift his attention to inflation.

The Federal Open Market Committee, the Fed’s top policy-making body, reported on Tuesday that it met on Sept. 26 and 27, and that it kept its benchmark short-term interest rate unchanged in a range of 1.25 to 1.5 percent.

Last month, Fed officials raised the target rate to 1.5 to 1.75 percent. They updated the Fed’s economic projections for 2017 and 2018, noting in their statement that they now expected to raise the federal funds rate another quarter-point in December to 1.25 to 1.5 percent.

The Fed said this time around, it would be raising the target rate so that growth will slow and even begin to slow “over time,” and unemployment will begin to dip below the “slack” rate in the labor market. The tax proposals under review by Congress, which would include cutting taxes on corporations and individuals and making infrastructure improvements, have already been linked to low inflation and the tax cuts would likely fuel inflation.

Investors and economists also remember how an independent Fed has been able to manage inflation without relying on central banks in Germany, Japan, and Europe, which have made major, long-term mistakes with their monetary policies.

On Tuesday, the stock market fell slightly after the Fed’s announcement, suggesting investors were surprised by the Fed’s decision to keep the rate unchanged.

The Fed has noted that labor markets are “close to full employment” but that low inflation is not yet pushing up wages. Federal Reserve Chair Janet Yellen noted this week that “the projected medium-term path for the federal funds rate seems to me quite firm in light of the strong underlying momentum in the economy.” But many analysts are concerned that as unemployment falls and inflation ticks up, there could be issues with monetary policy and central banks in general.

Ms. Yellen also noted the risks of changing central bank thinking about its policies, which she thinks of as a balance sheet. “Changes in the balance sheet could have an adverse impact on financial stability. We just have to be very careful about it,” she said.

Federal Reserve officials like Yellen and Fed Gov. Lael Brainard have said they are willing to keep the federal funds rate steady near 1.5 percent through 2018.

A number of analysts have suggested that “normal” interest rates are at least 2.5 percent, which is when the economy is growing at around 3 percent. The rate last rose to 2.5 percent when the economy was struggling in 2009, as the country slipped into its worst recession since the Great Depression.

The last point of the day on the trading boards for September was not an overreaction, Mr. Brainard said on Tuesday. “We are still convinced that there is still a considerable distance between the Fed’s current level of policy normalization and that of full employment,” she said.

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