The Federal Reserve’s new chairman was keen to keep the markets sweet when he presided over its interest rate-setting committee for the first time last week.
Jerome (Jay) Powell and colleagues presented an upbeat picture of US economic prospects, reporting that activity has strengthened in recent weeks. Gross domestic product (GDP) for the first quarter of 2018 is now expected to come in at 2.7%, rather than the 2.5% rate forecast last December. For 2019, the Fed’s team currently foresees a growth rate of 2.4%.
The chief’s reviews for his first major post-promotion press conference were generally favourable, even if one analyst remarked of his performance: “Powell is good at seeming to answer questions directly while giving away very little.”
The Fed also shows few signs of worry in its outlook for inflation, although its growth projection is well above 1.8% – the rate it views as consistent with stable inflation. In Powell’s own words: “There is no sense in the data that we are on the cusp of an acceleration in inflation,” and his team is “very alert” to any upward pressure resulting from the current low US unemployment rate.
Measures of inflation
So, while inflation is expected to edge higher it is also seen as staying reassuringly close to the Fed’s target of 2%. Members of its rate-setting committee have indicated they expect a modest overshoot before the rate stabilises, with inflation rising to 2.1% next year and staying there until the end of 2020.
It should be mentioned that as with other major economies, the US has more than one measure of how swiftly prices are rising.
Best-known is the consumer price index (CPI), which measures the cost of a basket of goods and services, including housing costs. In February, the CPI was up 0.2% on the month and 1.8% from a year earlier, having gradually edged up from near-zero over much of 2015.
The Fed’ own preferred measure of inflation is the slightly more sophisticated personal consumption expenditures (PCE) index. This tends to show a lower rate than the CPI and reflects what businesses are charging for their goods and services. It also revises the spending categories measured more frequently. The core PCE jumped by 0.4% in January this year, but that wasn’t enough to push the annual rate up from 1.5%.
It is generally agreed that Powell and colleagues won’t be too dismayed if US inflation moves above the Fed’s 2% target, provided that the overshoot is only modest and helps keep the motor of US economic growth running smoothly for several more years.
“Let me be clear: a small and transitory overshoot of 2% inflation would not be a problem,” said William Dudley, president of the Federal Reserve Bank of New York, back in January. “Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.”