(Bloomberg) — Fed Chair Janet Yellen said FOMC may have misjudged fundamental forces driving inflation and strength of labor market, and policy makers “stand ready to modify our views based on what we learn.”
“We will need to stay alert” and adjust monetary policy as information comes in, Yellen said in text of speech Tuesday in Cleveland during annual meeting of National Association for Business Economics
“My colleagues and I must be ready to adjust our assessments of economic conditions and the outlook when new data warrant it”
Downward pressures on inflation “could prove to be unexpectedly persistent”
Economic outlook is subject to “considerable uncertainty”
FOMC’s understanding of the forces driving inflation is “imperfect,” policy makers recognize “something more persistent” may be responsible for current undershooting of long-run objective
While inflation will most likely stabilize around 2% over the next few years, “odds that it could turn out to be noticeably different are considerable”
There’s also risk that inflation expectations “may not be as well anchored as they appear and perhaps are not consistent with our 2 percent goal”
Stabilizing inflation at around 2% “could prove to be more difficult than expected”
Key assumptions underlying baseline outlook “could be wrong” in ways that imply inflation will remain low for longer than currently projected; for example, labor market conditions may not be as tight as they appear
Under certain conditions, “continuing to revise our assessments in response to incoming data would naturally result in a policy path that is somewhat easier than that now anticipated”
Significant uncertainties strengthen the case for gradual pace of tightening; however, Fed must also be wary of moving too gradually; “it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent”
Actual value of long-run sustainable unemployment rate “could well be noticeably lower” than FOMC currently projects; can’t rule out possibility that some slack still remains in labor market
Unemployment rate is probably “correct” in signaling that labor- market conditions have returned to pre-crisis levels; however, that doesn’t necessarily mean that economy is now at full employment
Data suggest a generally healthy labor market, although can’t make “any definitive assessment”; policy makers “must remain open minded on this question” and its implications for reaching inflation goal
NOTE: In Sept. 20 press conference, Yellen said fall in inflation this year was a bit of a “mystery”
“A more important issue from a policy standpoint is that some key assumptions underlying the baseline outlook could be wrong in ways that imply that inflation will remain low for longer than currently projected.”
Like excluding home price growth from inflation calculations?
Good guess that 2% inflation may be hard to find since Core CPI price growth YoY (yellow line) exceeded 2% only briefly in 2012 after The Great Recession.
And the market risks overheating if more rate hikes don’t occur. Ahem. Despite Atlanta Fed President Raphael Bostic saying “I actually don’t think that our policies are too easy in the sense of really facilitating some sort of asset bubble,” asset prices look increasingly frothy.
Here is Yellen singing “Inflation around the corner for us.”