Fed Chair Janet Yellen says that the Fed may have misjudged inflation. She adds that low inflation is undesirable. Low wage growth is due to low productivity growth. On the other hand, she says that she does not want to move “too graduallyâ€. This sends the dollar higher after the initial fall, but like Yellen, the dollar seems uncertain.Â
In any case, the Fed should adjust according to the data – data dependent as always.
Additional points:
- Inflation expectations may have “slipped a bit†over the past 2-3 years.
- There are considerable odds that inflation will not stabilize in the next year and a half.
- Downward pressure on inflation could be unexpectedly persistent.
- But low inflation likely reflects factors that should fade.
- And it would be imprudent to wait until inflation hits 2%.
- Labor conditions may not be as tight as they seem to be
- Idiosyncratic price drops caused some declines this year.
- Is the unemployment rate alone an adequate measure for slack? It is the best single measure, but the prime age employment is lower
- Prime age could be a result of less need for lower-skilled workers, disability, etc.
- She sees hints of stronger wage gains to come
- Standard empirical analyses confirm the Fed’s policy.
The speech ended with the dollar ending it modestly lower.
More: Chasing USD Strength On Fed Tightening Hopes Strategically Unrewarding – ING
Here is the rise in USD/JPY that her words triggered. The moves are mimicked in other currency pairs.
