Until There Is Stronger Evidence that Inflation Will Return to 2%, Monetary Policymakers Should Remain Patient about Removing Accommodation

November 11th, 2014
in econ_news

from the Federal Reserve Bank of Boston

Federal Reserve Bank of Boston President Eric Rosengren explored the worrisome implications of very low inflation. "Many central banks around the world have persistently missed their stated inflation targets" since the financial crisis, said Rosengren. He described why too low an inflation rate can be costly, and why it is "important that our inflation target be viewed as 'symmetric'" – meaning that too-low inflation merits a response, as would too-high inflation.

Follow up:

When the starting point is very low inflation, Rosengren said, an unexpected weakening of the economy could lead to outright deflation – a fall in the overall level of prices that leads people to postpone expenditures. Deflation also brings pain for debtors, as the real value of their loan payment rises.

The long period of mild deflation that Japan faced was also a period of slow economic growth. In Europe, inflation rates have continued to decline, and combined with very weak economic growth have raised concerns among some observers that the Eurozone could experience mild deflation as well. Said Rosengren:

When inflation and interest rates are already quite low, monetary policy has only limited room to further lower interest rates to offset negative shocks to the economy" before hitting zero. Also, failure to achieve a clearly stated inflation target can undermine the credibility of a central bank, which can unsettle expectations.

Rosengren said "one possibility for why we have been missing on the Federal Reserve's 2 percent inflation target could be that there remains significant labor market slack." He noted the still-elevated level of the broader measure of unemployment that includes workers who are part time for economic reasons and who are marginally attached to the labor force.

"We should not be complacent about persistently missing our inflation target," concluded Rosengren. And "until it is clear that we are on the path to achieving both our 2 percent inflation target and maximum sustainable employment," monetary policymakers should remain patient about removing accommodation.

Rosengren was delivering the H. Parker Willis Lecture in Political Economy at Washington and Lee University.

[click on image below to read the entire speech]

[click here to see all the figures and comments]

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

 navigate econintersect.com


Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2018 Econintersect LLC - all rights reserved