Fed Bank of St. Louis President James Bullard, one of the most vocal policy makers in recent months arguing to raise interest rates, sounded a more cautious note Thursday by saying the latest tumble in oil prices may delay the return of inflation to the central bank’s 2 percent target.
Advertisement
The Fed’s preferred gauge of inflation has remained under its 2 percent goal since May 2012, with prices rising 0.4 percent in the year through November.
But he said both market-based and long-term measures of inflation expectations have been declining, and their continued fall “is becoming worrisome”. But since then a marked drop in China’s stock market and the yuan, a stubbornly strong USA dollar and a further decline in oil prices to near 12-year lows have presented a recurrence of challenges the Fed hoped it had left behind last autumn.
The Fed raised rates in December in the face of low unemployment and expressed “reasonable confidence” that inflation would increase. December import prices fell 1.2 percent.
In the second case, he described a scenario in which oil prices instead continue to fall and stabilize at $20 per barrel by June 2016.
Core PCE inflation, the key inflation indicator monitored by the Federal Open Market Committee, is likely to be just 1.6 percent in 2016.
Bullard, known as an advocate of raising interest rates, acknowledged that he had supported the traditional view in gauging inflation that price changes in oil and other commodities are transitory. Central-bank officials, in turn, are watching this shift in inflation expectations carefully. In particular, he noted that market-based indicators of inflation expectations have fallen in tandem with the decline in oil prices since mid-2014.
Advertisement
Bullard, chief executive of the Federal Reserve Bank of St. Louis, spoke to the Economic Club of Memphis at the Holiday Inn on the University of Memphis campus. As the nation’s central bank, the Federal Reserve System formulates USA monetary policy, regulates state-chartered member banks and bank holding companies, provides payment services to financial institutions and the US government, and promotes financial literacy, economic education, and community development.
