The Fed is having second thoughts about raising interest rates further

  • Federal Reserve Chair Janet Yellen raised fresh concerns about low inflation in Tuesday evening speech.
  • Fed minutes from Nov. 1 meeting show doubts exist among policymakers about whether low inflation is in fact transitory.
  • Wall Street is still counting on a December interest rate hike, but future rate increases may be in doubt unless inflation and wages pick up.

Between Janet Yellen’s speech Tuesday night and the minutes of the Federal Reserve’s November meeting, one message is becoming increasingly clear: Officials are growing uncomfortable with their own forecasts for a “transitory” period of inflation below the central bank’s target. It means interest rates may not climb the way many on Wall Street expect. As Yellen prepares to cede the helm of the central bank to her colleague Jerome Powell early next year, these concerns cast doubt over the Fed’s own forecasts for several additional interest rate increases in 2018 and 2019.

“I will say I am very uncertain about this,” Yellen conceded in remarks on Tuesday evening. “My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely.”

Traders believe the Fed’s Dec. 12-13 meeting is too soon for a change of course, and markets have long priced in an additional interest rate hike at that meeting. The Fed has raised interest rates four times in halting steps since December 2015, to a 1% to 1.25% range, having left them at essentially zero for seven years in response to the Great Recession.

Still, further hikes are far from certain. Minutes from the central banks latest policy meeting reaffirmed Yellen’s tone, and suggested others on the committee share her views.

The minutes said “many participants observed that continued low readings on inflation, which had occurred even as the labour market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent.”

Needless to say, financial markets are on tenterhooks to listen to the next time Powell, who has much less experience in monetary policy and economics than Yellen and has spoken fairly little on interest rates, speaks on the record.

Yellen and her colleagues have previously expressed surprise at an inflation rate that has continued to undershoot the Fed’s official 2% target for much of the economic recovery, a trend that suggests the labour market is not fully healed despite a historically low 4.1% jobless rate.

Another key sign of trouble: Wages are not rising for most Americans, leading to a loss of purchasing power despite low reported inflation readings.

Unless both wages and inflation begin to pick up pretty soon, Fed officials under any leadership should reconsider their gusto to tighten financial conditions in a still-fragile economy.

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