Fed Downplays Risk of US Inflation

Federal Reserve policymakers stated that there are no indications that their aggressive measures to improve the US economy would lead to inflation in the future. It is a clear sign that they will continue the stimulus action to boost growth.

Last month, the Fed maintained its controversial program of purchasing $85 billion worth of bonds each month. It pledged to keep interest rates near zero until unemployment goes down to at least 6.5 percent and as long as inflation remains under 2.5 percent.

Chicago Federal Reserve President Charles Evans and Minneapolis Fed President Narayana Kocherlakota said they will continue to support the program even if other Fed officials want to taper the bond purchases. Evans said that without indicators of an actual inflation, the debates on inflation risk are talks with no concrete evidence.

According to the minutes of the Fed’s March 19 to 20 meeting that was released Wednesday, most of the 19 policymakers thought the rate of bond buying could slow down in the next couple of months as long as the labor market continues to improve. But recent reports released after the meeting showed minimal job growth in March and jobless rate of 7.6 percent. The unemployment rate was down from 7.7 the previous month because people gave up looking for work.

The Fed’s preferred inflation measure is around 1.3 percent, which is below its goal of 2 percent. Kocherlakota said that a balanced policy approach would let inflation change from its 2 percent goal to decrease US unemployment.

Kocherlakota supports for more accommodation from the Fed via decreasing the threshold at which the US central bank will consider increasing rates from near zero from the current 6.5 percent to 5.5 percent. Atlanta Fed President Dennis defended the bond buying and said that the elements needed to spark inflation are not in place today.