The Fed’s view on inflation is quietly shifting. Here’s why. By Jeanna Smialek November 1, 2019 – The New York Times

In the summer of 1999, the colleagues lifted interest rates to guard against chair, , had a strange the quicker price gains they were confident a conundrum on his hands. strong economy would bring. Unemployment was low and companies were Today, that expectation has dissipated and the profitable. International risks that had current Fed chair, Jerome H. Powell, indicated prompted the central bank to cut interest rates this week that the central bank might need to three times in 1998 had faded from view. Yet see real-life increases before taking any action. inflation, which the Fed is charged with “The reason why we raise interest rates, stabilizing, remained subdued. generally, is because we see inflation as “What we have now is clearly an ambivalent moving up, or in danger of moving up set of circumstances,” Mr. Greenspan said at a significantly, and we really don’t see that July policy-setting meeting. “We are getting a now,” Mr. Powell said Wednesday, speaking very dramatic acceleration in aggregate at a news conference following the Fed’s demand but we are not seeing the usual effect October meeting. in prices.” “We would need to see a really significant Fast forward 20 years, and today’s Fed could move up in inflation that’s persistent before we soon face a strikingly similar situation. would consider raising rates to address Officials cut interest rates for the third time this inflation concerns,” he added later. year on Wednesday, part of an effort to The Fed’s more reactive, rather than proactive, inoculate the economy against any harmful stance has been shaping up over the course of fallout from President Trump’s trade war and this year and signals a break with its recent slowing global growth. The 2019 interest rate past. cuts have been modeled, in part, on Mr. Greenspan’s 1998 cycle. The Fed raised interest rates nine times from 2015 to 2018 to guard against more rapid price Stock prices are soaring and corporate earnings increases. As the unemployment rate are coming in strong. Should risks stemming plummeted after hitting 10 percent in 2009, from Mr. Trump’s trade war and Britain’s exit officials believed that faster wage gains and from the European Union fade, the Fed could higher inflation must be around the corner. see a stabilization similar to what occurred in 1999. Officials have signaled that they are Paychecks did swell, though less substantially going to hold off on cutting rates further for than the jobless rate, now at 3.5 percent, might now, assuming the data hold up. have suggested. Prices barely budged. A steadying risk outlook could once again “We have been below target, in round come amid soft inflation. A key price index numbers, 90 percent of the time for the past 10 posted a 1.3 percent gain in September, data years,” said Torsten Slok, a managing director released Thursday showed, far short of the at Deutsche Bank Securities. That is driving a central bank’s 2 percent target. “fundamental shift” in how central bankers think about inflation. But there is a critical difference between then and now. In 1999, Mr. Greenspan and his 2

It more than a simple change in tone. The Fed anytime within the next five years, despite a is midway through a review of its policy recent policy rate cut. framework, and Mr. Powell said this week that “We of course have watched the situation in he was hoping to come up with a better way to Japan, and now the situation in Europe,” Mr. keep inflation oscillating around 2 percent. Powell said this week. “We note that there are “That’s at the very heart of what we’re doing significant disinflationary pressures around the in the review,” he said. world, and we don’t think we’re exempt from those.” Many economists think the Fed could decide to try to average 2 percent inflation over time. In The Fed has come comparatively close to recent business cycles, that would have called hitting its price target and prices have been for longer periods of very low interest rates. slowly climbing this year — many economists still expect them to hit 2 percent. Slow price increases might sound great to an everyday shopper, but they are bad news for Randal Quarles, the Fed’s vice chair for monetary policymakers. supervision, said Friday that while current inflation readings “are below our 2 percent Central banks began targeting inflation in the inflation objective, they are fairly close, and 1990s as a way to keep the value of money my assessment is that inflation will inch from changing quickly, destabilizing the toward our objective in the coming months.” economy. The Fed formally adopted a 2 percent target in 2012, making a case that the But consumer inflation expectations have level was low enough to allow for comfort and begun slipping in the United States. confidence on Main Street while guarding A of New against outright price decreases. That target is York measure of longer-run consumer meant to be symmetric, meaning that the Fed inflation expectations is at its lowest level is equally unhappy if prices run below or above since the series started in 2013. The University 2 percent. of Michigan consumer survey’s inflation The seven years of consistent misses that have expectation index has also edged down. followed are a cause for concern — partly , the Fed’s vice chair, said on because of how similar stories have played out Friday that “measures of inflation expectations abroad. reside at the low end of a range I consider In Japan, inflation expectations began to slip in consistent with price stability.” Mr. Powell has the early 1990s as real-time price gains emphasized the importance of anchoring them muddled along below 2 percent. Businesses at a level consistent with hitting the central and consumers became hesitant to charge or bank's price goal. pay more, and that locked in tepid increases. They are not alone in that focus. , Prices are now growing less than 1 percent a a Fed governor, has suggested that the central year, even after the central bank slashed bank could embrace “opportunistic” reflation: interest rates into negative territory and allowing temporary price increases from tariffs unleashed an aggressive asset-buying or other sources to go unopposed, proving that campaign. the Fed is serious about its target. The malaise seems to have spread to the Even Mr. Trump, who has been pressuring the eurozone. One set of forecasts published by the politically independent Fed to lower interest European Central Bank suggests economists rates and support growth, has occasionally do not expect inflation to hit its 2 percent target couched his criticism in terms of prices. 3

“The USA should always be paying the lowest “Easing policy might lift inflation, but at the rate. No Inflation! It is only the naïveté of Jay cost of further tightening an already hot labor Powell and the Federal Reserve that doesn’t market and perhaps fostering financial allow us to do what other countries are already imbalances,” Ms. George said in a recent doing,” he posted on Twitter in August. speech. “And given the reduced responsiveness of inflation to economic slack, But leaving interest rates low to push inflation it might take a considerable dose of monetary higher could come at a cost. accommodation to nudge inflation upward.” Cheap money can spur excessive risk-taking as For now, Wall Street is convinced that investors chase higher returns, as happened in borrowing costs will not move higher in the both the early 2000s — when a bubble in near term. It is probably at least partly internet stocks burst and killed the expansion reflective of glum economic outlooks, but — and in 2008, when low interest rates helped market pricing suggests that investors see rate to contribute to a housing boom that, cuts — and not rate increases — as a compounded by financial packaging, brought possibility next year. the global financial system to its knees. “We’re not thinking about raising rates right That has kept some officials, like Esther now,” Mr. Powell said this week. George, president of the Federal Reserve Bank of Kansas City, from supporting the central bank’s recent rate cuts.