The Federal Reserve can leave interest rates where they are for now because inflation is not likely to rise much even if the US job market continues to improve, Reuters reports, citing St. Louis Fed President James Bullard.
“The current level of the policy rate is likely to remain appropriate over the near term,” Bullard told the America’s Cotton Marketing Cooperatives 2017 Conference in Nashville, Tennessee.
The personal consumption expenditures (PCE) price index excluding food and energy, which is the Fed’s preferred gauge of inflation, has been running at 1.5 percent and has trended away from the central bank’s 2 percent target in recent months.
That measure is forecast to rise only to 1.8 percent if the US unemployment rate falls to an “unprecedented” 3 percent from the current 4.3 percent, Bullard said. With so little upward pressure on inflation, the Fed does not need to raise rates to slow growth, he said.
Bullard’s comments are largely in line with those he has been making for over a year. He has argued that the Fed does not need to raise rates until the US economy breaks out of its pattern of low inflation and about 2 percent annual growth.
Most of his Fed colleagues have stuck to their forecast that inflation is headed back to 2 percent over the next couple years, even though their forecasts have proven overly optimistic for years.
Bullard noted that the dollar has declined in value this year, chalking that move up largely to improved growth forecasts for Europe and the expectation that the European Central Bank will respond by tightening monetary policy.
Over the past couple of years a stronger dollar, along with falling oil prices, has been a key driver of lower US inflation, and some have suggested that recent dollar weakness could help lift inflation.
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