Fed Credibility to Keep Price Expectations Moored, Yellen Says
Federal Reserve Bank of San Francisco President Janet Yellen said the Fed’s inflation-fighting credibility sustained public confidence in price stability as the price of oil rose to a record last year.
The central bank’s attention to inflation should help moor price expectations amid signs of disinflation, Yellen, who votes on monetary policy this year, said in a speech to economists and central bankers in New York today. The Fed’s new longer-term inflation projections, released last week, should help “reinforce inflation expectations of around 2 percent.”
Yellen’s comments came in response to a paper prepared for the conference, in which four economists said Fed officials should have been more wary of a long climb in oil prices earlier this decade to a record high of $147.27 a barrel in July. Yellen defended the Fed’s actions, saying she didn’t think inflation expectations “were close to becoming unanchored at any point.”
At the same time, “the Fed must always be vigilant in guarding its inflation credibility,” Yellen said in prepared remarks to the U.S. Monetary Policy Forum, a conference sponsored by the University of Chicago Booth School of Business and the Brandeis International Business School.
Oil has since plunged, trading today at $43.24 a barrel.
“Any boost to spending from falling oil prices will be more than welcome in the current circumstances,” said Yellen, a former Fed governor who also chaired former President Bill Clinton’s Council of Economic Advisers paperless payday loans. “With inflation now below desirable levels, a decline in inflationary expectations that could push core inflation down over time would be most unwelcome.”
Inflation Measure
The Fed’s preferred inflation measure, the personal consumption expenditures price index minus food and energy, averaged 2.2 percent in 2008, the same rate as the average for the three previous years. The PCE measure including food and energy averaged 3.3 percent last year, and rose to 4.5 percent in July.
“The Fed should have paid some attention to the signals coming from oil prices and raised interest rates faster and higher than it did in 2004 to 2006,” according to the paper by economists Ethan Harris of Barclays Capital Inc., Bruce Kasman of JPMorgan Chase & Co., Matthew Shapiro of the University of Michigan, and Kenneth West of the University of Wisconsin.
Yellen responded that the “arguments in this paper did not persuade me to change my opinion of recent Fed policy.”
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