After years of struggling to reduce high unemployment, the Federal Reserve is grappling with another tough challenge — How to raise very low inflation.
So far, the Fed has had more success with the unemployment rate, which has fallen more than a percentage point to 7 per cent since the Fed launched its bond-buying program last year. But inflation has declined since then and remains far below the Fed’s 2 per cent target. Fed policymakers expect inflation to remain below the target through at least 2015.
“There is still this question about inflation, which is more than a bit of a concern,” Chairman Ben Bernanke said at a news conference on Wednesday. The Fed “is determined to avoid inflation that is too low, as well as inflation that is too high.”
Most Americans likely prefer lower inflation when they pick up groceries or shop at the mall. But Mr. Bernanke and many other economists worry that if inflation falls too low, it will lead consumers and businesses to delay spending. That’s because shoppers feel less pressure to rush their purchases if prices aren’t rising much. Some items, such as clothing, furniture and televisions, have become less expensive in the past year. Very low inflation also makes debts comparatively more expensive to pay off.
Stimulus cut The Fed decided on Wednesday to cut its monthly bond purchases to $75 billion from $85 billion starting in January. Mr. Bernanke suggested that the purchases could end by late next year. That’s evidence that the Fed thinks the job market and economy will continue to improve with less help from the Fed. But if inflation remains too low, Mr. Bernanke said the Fed might decide to keep short-term interest rates near zero for a longer period or take other steps to try to boost inflation. “It’s difficult to get inflation to move quickly to target,” he said. Too-low inflation also raises the threat of deflation, a debilitating drop in prices that can cause a recession.
