Federal Reserve Bank of St. Louis President James Bullard said Friday the surprising weakness of inflation right now doesn’t necessarily support the U.S. central bank keeping interest rates at their current near-zero levels.
“The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said in material prepared for a speech in Chicago.
Most central bankers expect to raise short-term interest rates this year, with key officials favoring a mid-year point for action. The problem these officials confront is a decided lack of price pressures. The Fed has fallen short of its inflation goal for 2 1/2 years, and the drop in oil prices means rising inflation will prove even more elusive. Some economists have warned negative headline price readings could prevail for much of the year, and if that is right, raising rates would be an unprecedented act in an outright deflationary environment.
Most Fed officials has indicated they will look through what they see as transient weakness, believing that inflation will still move back toward 2% as the economy grows and labor markets continue to mend. But Fed forecasts on this front have been repeatedly wrong.
Inflation Targeting is like the proverbial cat: unfortunately it seems to have “9 lives”!