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WASHINGTON (MN) - - The following is a response of Federal Reserve
Chairman Janet Yellen to a question from a reporter at her press conference
following Wednesday's Federal Open Market Committee meeting.
-- recently gave a speech in which she said trend inflation appeared to
lower around half a percent, and I wanted to ask, do you agree? And what would
the Fed need to do, if anything, to boost trend inflation if it has fallen. And
related to that, you said you expect the inflation softness this year to prove
transitory. Compared to three months ago, how firm is your expectation that the
slow down will remain transitory and what implications would that have for
monetary policy, if it is not.
So the term trend inflation usually, there are a variety of statistical
techniques that can be used to extract a trend from a series. Exactly what that
means is, in some sense, a statistical thing, and there are methodologies that
would show some modest decline in recent years in the trend. After all, we've
had a number of years in which inflation has been low, as I said in answer to an
earlier question, I think if you go back to, say, 2013 and consider the, until
this year, the reasons why inflation was low are not hard to understand. It's a
combination of slack in the labor market, declines in energy prices, and a
strong dollar that pulled down import price inflation.
So, what's important in determining inflation going forward is inflation
expectations by some survey measures, professional forecasters, those have been
rock solid. We do also look at household expectations which have come down
some. Market-based measures of inflation compensation, as we mentioned in the
statement, they have declined, and they have been stable in recent months, but
they have declined to levels that are low by historical standards. That might
suggest that inflation expectations have come down, but one can't get a clear
read. There are risks premium built into inflation compensation that make it
impossible to extract directly what inflation expectations are. So, you know,
there is a miss this year. I can't say I can easily point to a sufficient set
of factors that explain this year why inflation has been as low. I've mentioned
a few idiosyncratic things but frankly it's more broad based than just
idiosyncratic things. The fact that inflation is unusually low this year does
not mean that that's going to continue. Remember that in January and February,
core inflation was running over a 12-month basis at around 1.9 percent and we
look to be very close to two. Now, we have several months of data that have
meaningfully pulled that down, and what we need to do is figure out whether or
not the factors that have lowered inflation are likely to prove persistent or
they're likely to prove transitory.
And that's what we're going to try to be determining on the basis of incoming
data. And you asked me about the policy implications. Of course, if we
determined, our view changed, and instead of thinking that the factors holding
inflation down were transitory, we came to the view that they would be
persistent, it would require an alteration in monetary policy to move inflation
back up to 2 percent, and we would be committed to making that adjustment.
--MNI Washington Bureau; +1 202-371-2121; email: email@example.com