MNI Fed's Yellen: Expect Infl to Move Up, But 'Very Uncertain'

--Fed Must Balance Risks In Gradually Raising Rates

     WASHINGTON (MNI) - Federal Reserve Chair Janet Yellen said Tuesday that

idiosyncratic and transitory factors are most likely to blame for surprisingly

weak inflation this year, but that Fed officials are very uncertain whether

inflation will move back up toward 2% in the near future.  

     The following are excerpts of her remarks during a Q&A at New York

University on Tuesday: 

     Q:  Why is inflation so low at a time when unemployment is near 4%?

     A:  This year, low inflation is surprising. Because we're at essentially

full employment, with a 4.1% unemployment rate. Oil prices have been stable, the

dollar has been roughly stable. Inflation is surprisingly low. But I guess what

I would say, and what the working hypothesis of our committee is, is that look,

there are other factors, a whole range of idiosyncratic kind of factors, most of

which may be temporary, transitory things that affect inflation, other than

slack in the labor market, oil prices and the dollar. 

     For example, for several years now, health care costs have been rising less

rapidly than they typically do partly because of changes related to the

Affordable Care Act. That may be a big enough sector that that's had an

influence, but one that's likely to be transitory. Earlier this year, in March

and April, the way in which mobile phone companies charge for data plans -- they

began to offer unlimited data. And although nobody really saw their cell phone

bills change a whole lot, the statisticians at the Bureau of Labor Statistics

decided that that was really a massive decline in the effective cost of cell

phone services and that caused a very large decline in prices. 

     So there are idiosyncratic factors I would hypothesize that are holding it

down this year. We expect it to move back up over the next year or two, but I

will say I'm very uncertain about this. My colleagues and I are not uncertain

that it is transitory and we are monitoring inflation very closely. And I'll go

back to what I said earlier about keeping an open mind and not assuming you have

a monopoly on truth. It may be that there is something more endemic and long

lasting here that we need to pay attention to. 

     Q: What do you think are likely to be the biggest challenges facing the Fed

over the next few years? 

     A: The issues facing monetary policy at the moment I would say is: How to

craft a monetary policy that maintains a strong labor market but also moves

inflation back up to our 2% objective. We've been on a course and thinking it's

appropriate to gradually raise interest rates toward normal levels, but ones

that as I indicated previously will be regarded as low levels by historical

standards. But there are risks and policymakers will have to evaluate the risks.

And the risks are two-sided. On the one hand, if we remove policy accommodation

too rapidly, well in the extreme that could cause a downturn in the economy. But

perhaps as relevant at the moment, is that we might leave inflation, inflation

might not move back to our 2% objective. And we might become stuck with an

inflation rate that doesn't get back to 2%. 

     A lot of people feel low inflation is desirable. What's wrong with having

1.5% inflation rather than 2% inflation? But actually it can be quite dangerous

to allow inflation to drift down and not to achieve over time a central bank's

inflation target. One reason it's dangerous is because inflation expectations

are likely to also drift down. And indeed there is some evidence -- I don't

really think they've drifted down very much -- but there is some suggestion,

some hint that after many years of low inflation they may be drifting down and

that would be a very undesirable state of affairs. The lower inflation is the

lower the average level of interest rates in the economy. Anyhow we think the

new normal is a world where we think interest rates are going to be low. If we

do have a downturn, in some future year the economy is hit by a negative shock,

central banks need to have the tools to respond to another downturn to try to

limit its consequence for the job market and for inflation. But gee, how much

room will we have? 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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