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Monday, April 29, 2013

Tame Inflation to Keep Fed on Course

Go Away Federal Reserve System!
Go Away Federal Reserve System! (Photo credit: r0b0r0b)
By The Wall Street Journal

Washington, Apr.29, daily stocks .- Federal Reserve officials are likely to continue their easy-money policies at the central bank's policy meeting on Tuesday and Wednesday, in part because several recent inflation measures have fallen well below the Fed's 2% target.
With inflation now lower than the Fed wants, officials are likely to conclude their policies show no sign of overheating the economy. That allows them to maintain their $85 billion-a-month bond-buying program, which the central bank is employing to ease credit conditions and spur spending, investment and hiring.
Fed officials after their March policy meeting talked about tapering off the bond purchases later this year if the economy continued to gain strength. But inflation readings have since slipped, and employment numbers have been disappointing.
The Commerce Department reported Friday that its personal consumption expenditure price index—one of the Fed's favored measures of consumer price inflation—was up 1.2% in the first quarter from a year earlier, well below the central bank's target. It was the weakest annual reading since the third quarter of 2008, when the U.S. was consumed by the financial crisis.
The Fed tries to keep inflation stable near 2%, a level that central-bank officials believe supports steady economic growth and hiring. A slip much below that level could signal a weakening economy and flat wages.
"I'm a little worried about it," James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview this month. "I didn't really expect inflation to be this low."
A weak global economy is holding down commodity price inflation. Crude-oil prices are down 10% from a year earlier, gold is down 11%, and the Dow Jones-UBS broad index of commodity prices is down 5%. Overall prices of goods imported to the U.S. are down 2.7% from a year earlier, according to the Bureau of Labor Statistics.
Meanwhile U.S. wage inflation is modest in the slack job market: Average hourly earnings of workers in March were up 1.8% from a year earlier.
Several Fed officials have changed the way they are talking about inflation. In a late March speech, New York Fed President William Dudley described inflation as "below" the Fed target. In mid-April, after new inflation data emerged, he described it as "well below" target, the kind of subtle change central-bank officials often deploy after careful deliberation.
"If inflation is lower and continues to go lower than our target, that would be another reason potentially for not pulling back on our program," said Eric Rosengren, president of the Boston Fed, in an interview this month. Mr. Bullard said he would consider supporting an increase in bond purchases if inflation fell much further. ...
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