Federal Reserve Urges Ignoring Inflation

As job growth remains extremely weak and labor market indicators stay negative, the Federal Reserve is considering ignoring inflation in the short-term as it sets monetary policy.  Federal Reserve Bank of Chicago President Charles Evans said in a conference in London that the central bank might need to ignore high inflation in setting its monetary policy.

“Overshooting a little bit just to make sure you get to 2% strikes me as quite sensible,” he said, while acknowledging that inflation has been above the Federal Reserve’s 2% target for several months.

As job growth remains extremely weak and labor market indicators stay negative, the Federal Reserve is considering ignoring inflation in the short-term as it sets monetary policy.  Federal Reserve Bank of Chicago President Charles Evans said in a conference in London that the central bank might need to ignore high inflation in setting its monetary policy.

“Overshooting a little bit just to make sure you get to 2% strikes me as quite sensible,” he said, while acknowledging that inflation has been above the Federal Reserve’s 2% target for several months.

In March, the year-over-year change in the consumer price index (CPI) was 2.2%, excluding food and energy, according to the Bureau of Labor Statistics. Recent increases in gasoline prices in the United States, as they annualize low oil costs throughout 2015, may cause the total CPI, including energy and food, to be significantly higher.

While prices are rising, economic growth is not, with GDP growth rising just 0.5% in the first quarter of 2016, and forecasts for annual growth are weakening amidst poor labor and manufacturing data in America. A high trade imbalance, including weak imports and exports, is also causing fears that growth is slowing significantly in the country.

The view of a weak American economy has become global. European Central Bank Vice President Vitor Constancio replied to Evans’s view with agreement, expressing fears that lingering economic pessimism is holding America back.

“We are all hoping that the strength of the recovery in the U.S. will allow the Fed to increase rates and get away from the zero-lower bound,” Constancio said.

Yet at the same time, both economists and, gradually, Fed insiders alike are increasingly challenging the efficacy of monetary policy. Evans admitted the need for fiscal stimulus in the United States through Congressional actions to encourage public spending in the country—although public spending has fallen almost every year since the Global Financial Crisis began in 2007.

Fiscal policy, he said, is “providing less support than I would like,” echoing cries from Janet Yellen and Ben Bernanke that Congress step in and approve more spending at local and Federal levels to improve America’s infrastructure and spur job growth.

Meanwhile, growth expectations remain extremely low in the marketplace despite rising inflation. The 10-year U.S. Treasury was yielding 1.763% at the start of trading Tuesday, barely above the 52-week low of 1.64% and substantially below its historic average of 4.6%.

The weak growth expectations are largely an effect of last week’s disappointing jobs data, which showed just 160,000 new jobs were created in America, less than population growth would require. The Federal Reserve has nonetheless reacted positively in public to the report, saying that there was robust growth and pointing to an over 2% increase in average wages earned.