Officials within the Federal Reserve’s Board of Governors once again appear to be split on whether inflation will rise toward the central bank’s 2 percent target, which could indicate different attitudes about whether the Fed should raise interest rates this year.
Speaking at a event for business economists in downtown Washington on Monday afternoon, Fed Vice Chairman Stanley Fischer said that “we may well at present be seeing the first stirrings” of inflation, which has been running closer to zero than to the Fed’s target in recent months.
With the U.S. near full employment, he said, it would be expected that inflation would rise. The link between falling unemployment and rising inflation, known to economists at the Phillips Curve, “has never been very strong, but it exists,” he argued in text prepared for his address.
In a speech delivered simultaneously elsewhere in Washington, however, Fed governor Lael Brainard appeared to disagree, and said declines in unemployment have less effect on inflation than in the past.
Brainard also noted that there were risks that threatened to slow down economic growth and inflation, most notably the possibility of the Chinese economy weakening.
The Fed, Brainard was set to say at her speech, “should put a high premium on clear evidence that inflation is moving toward our 2 percent target.”
Nevertheless, Brainard did acknowledged that the most recent inflation data appear to show “core inflation,” a gauge that strips out energy and food prices, rising closer to 2 percent. She called it a “noticeable step-up.”
The Fed’s next meeting is scheduled for March 15 and 16 in Washington. Private-sector economists do not expect the central bank to change its monetary policy at the meeting.
At its December meeting, the Fed raised its short-term interest rate target from zero, where it had been since late 2008, to between 0.25 percent and 0.50 percent.
Before that move, Brainard and another governor, Daniel Tarullo, had suggested that the move might not be warranted, given that low levels of inflation were suggesting that the economy might be too unhealthy to tighten monetary policy. Brainard, in particular, appeared skeptical of relying on the idea of the Phillips Curve to set policy.
Eventually, however, both voted in favor of the rate hike at the meeting.
For her part, Chairwoman Janet Yellen has consistently said that she expects the Fed to get closer to its goal of 2 percent inflation once the effects of falling oil prices and the strengthening dollar played out. Both of those factors, she said, were likely to prove “transitory.”
Fischer reiterated that view Monday.
“When the dollar stabilizes, and when oil prices stabilize, we’ll see inflation” rising, he predicted.
