Fed: The inflation debate continues - Rabobank

The minutes of the December 12-13 meeting of the FOMC confirmed that despite squeezing in a third rate hike before the end of the year, the Committee was still puzzled by low inflation, according to Philip Marey, Senior US Strategist at Rabobank.

Key Quotes

“Many participants indicated that they expected cyclical pressures associated with a tightening labor market to show through to higher inflation over the medium term. These participants generally judged that much of the softness in core inflation this year reflected transitory factors and that inflation would begin to rise as the influence of these factors waned. However, one of them noted that secular trends, such as technological innovation or globalization, could be affecting competition and business pricing, and muting inflationary pressures.”

“What’s more, with core inflation readings having moved down this year and remaining well below 2 percent, some participants observed that there was a possibility that inflation might stay below the objective for longer than they currently expected. Several of them expressed concern that persistently weak inflation may have led to a decline in longer-term inflation expectations; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence from statistical models suggesting that the underlying trend in inflation had fallen in recent years.”

“A majority commented that they continued to expect inflation to gradually return to the Committee’s 2 percent longer-run objective. A few participants again noted that transitory factors had likely held down inflation earlier this year. However, several participants observed that surveybased measures of inflation expectations or market-based measures of inflation compensation remained low, or that other persistent factors may be holding down inflation, which would present challenges for the Committee in promoting a return of inflation to 2 percent over the medium term. In fact, Kashkari and Evans voted against the December hike.”