The Minutes of the December FOMC meeting is “fun” to read:
Participants generally anticipated that inflation was likely to decline further in the near term, reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices. Most participants saw these influences as temporary and thus continued to expect inflation to move back gradually to the Committee’s 2 percent longer-run objective as the labor market improved further in an environment of well-anchored inflation expectations.
With regard to inflation, a number of participants saw a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the Committee’s commitment to that objective.
With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time.
After battling inflation for almost three decades, FOMC members are now in the position of having to “pray” for more inflation! Call in the shrinks!
Interestingly, now they say that the fall in oil prices will have only temporary effects. In 2008 they thought that the rise in oil prices required “tightening”!
Even more interesting is the fact that as soon as the US became an official inflation targeter in January 2012, inflation dropped significantly below target and has remained there for the last three years!
And that´s no “fault” of oil prices, which remained pretty stable (approx. $100) between mid-2011 and mid-2014.
What could possibly give FOMC members’ confidence in six months’ time, when the first rate rise is “scheduled” to take place?
“Praying” won´t cut it. They have to do something that would get aggregate nominal spending up. But that´s not likely to happen and so there will be no “confidence that inflation will travel towards the target” and, therefore, the “rate rising date” will, once again, be postponed!
The charts illustrate.