No-show inflation poses conundrum for Fed

WASHINGTON: After tightening monetary policy last month for the second time this year, the US central bank is expected to pause for the next few months to monitor developments.
The Federal Reserve (Fed) will leave the benchmark interest rate untouched when it meets tomorrow and Wednesday, partly because it has yet to begin to wind down its huge stock of bond holdings, and will not make another move on interest rates until that process is under way.
But the Fed also faces a growing conundrum as it waits for signs of long-absent inflation to finally appear.
In the normal course of events, as an economy recovers and hiring increases, that brings with it rising wages and inflation, which in turn prompts the central bank to increase lending rates to keep prices in check while still allowing economic growth to continue.
But despite nearly seven years of uninterrupted job creation and a very low unemployment rate of 4.4%, inflationary pressures and wage gains show little sign of life.
The central bank is running out of explanations.
While the Fed is expected to implement one more rate increase late this year, there are divisions among policymakers on the timing.
Fed chair Janet Yellen told Congress this month that the central bank was not blind to the data showing inflation stubbornly below the central bank’s 2% target. “We’re watching it very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent,” she said.
"We're watching it very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent," she said, but it is too soon to say flat prices are due to more than transitory factors. – AFP