Valdosta Daily Times

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June 18, 2014

Fed debates over inflation data

WASHINGTON — The Federal Reserve received some further cause for discussion at its policy meeting this week with a report Tuesday of a surprising jump in consumer inflation.

Yet most economists aren’t altering their view that the Fed’s first interest rate increase is at least a year away. Analysts cautioned that that time frame could change if inflation were to accelerate. The consumer price index rose 0.4 percent in May, the government said, and has risen 2.1 percent over the past 12 months — roughly at the level of the Fed’s target rate for inflation.

It’s why the Fed might actually welcome the news of slightly higher inflation: It will help ease long-standing concerns that inflation might be too low. For the past two years, inflation by one key measure has remained under the Fed’s 2 percent target.

“I don’t think the Fed is going to express concern about the May price increase,” said Joel Naroff, chief economist at Naroff Economic Advisors.

When the Fed issues a statement Wednesday after its meeting ends and updates its economic forecasts, and then Chair Janet Yellen holds a news conference, investors will be seeking clues about when short-term rates will finally rise. They will also be looking for hints about how and when the Fed will start unloading its vast investment holdings.

The answers will affect loan rates for individuals and businesses — and perhaps the direction of the economy. Yet few expect to hear anything definitive.

The Fed remains in a tentative wait-and-see stance.

Though the central bank has signaled optimism, officials are unsure how much the economy will strengthen the rest of the year. In its updated  forecasts, the Fed may downgrade its estimate of growth for 2014 after the government said last month that the economy shrank in the first quarter, depressed by a harsh winter.

The International Monetary Fund this week predicted that the U.S. economy will grow a modest 2 percent this year, below the IMF’s previous estimate of 2.7 percent.

Yellen has suggested that the U.S. unemployment rate, now 6.3 percent, overstates the health of the job market and economy. She’s also expressed concern that a high percentage of the unemployed — 35 percent — have been out of work for six months or more and that pay is scarcely rising for people who do have jobs.

Yet the Fed is getting closer to acting. The minutes of its last meeting in late April indicated that the Fed has begun discussing the tools it could use to finally pull back the extraordinary stimulus it’s provided the U.S. economy since 2008.

This week’s meeting is the third at which Yellen will preside as chair since succeeding Ben Bernanke in February. Analysts expect at least one announcement when the two-day policy meeting ends Wednesday: That the Fed will make a fifth $10 billion cut in the pace of its monthly bond purchases to $35 billion, a sign of a steadily, if slowly, improving economy.

The Fed has been buying Treasury and mortgage bonds to try to keep long-term loan rates low to stimulate the economy.

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