Outgoing Fed Chair Shares Both Surprise & Optimism Over Inflation

Janet Yellen, Chair of the Federal Reserve, will see her term end in February after once being rumored as the possible presidential pick to lead the U.S. Central Bank. She recently gave a widely-reported speech with one of the biggest take-aways from this PhD-holding economist being that the inflation rate is “puzzling”...even to those whose career it is to predict these things. Despite the seemingly impressive related economic factors, inflation rates have yet to hit the Fed's benchmark number, which is causing no small amount of consternation among these renowned number-crunchers. Yellen did offer valuable insight into what may be behind the lagging inflation, as well as her sense of optimism about the economy as a whole.

stockspic.jpg

We looked at Janet Yellen's speech as reported by both Bloomberg  and CNN Money. Yellen's speech was delivered to an audience of international central bankers in the nation's capital. It was in this speech that she called inflation “puzzling” as well as a “surprise.” A good rate of inflation and a stable economy are intrinsically linked; the Fed would like to see 2% annual growth. Thus, it is that they are puzzled when other economic factors such as unemployment are strong but inflation isn't following suit. Inflation has yet to meet the 2% Fed criteria – the August rate was 1.3%.

Conversely, unemployment is beating expectations. We're experiencing the lowest rate of unemployment since before the global financial crisis – at 4.2%. While it is true that wage growth has been slow, it hasn't been non-existent and is beginning to pick up steam. What are Janet Yellen's theories about the mysteriously lagging inflation numbers? She considers that expectations themselves may be to blame; if people expect prices to remain low, they may put off purchasing. Yellen even suggested that technology could be behind sluggish inflation. She wonders at the Fed's basis for understanding inflation and notes that the boom in online shopping may be a factor.

Although inflation hasn't met Fed standards, that isn't to say there has been no inflation. Rates have increased three times this year, with officials expecting another rate hike in December. Yellen said she believes that the persistent “strength” of the economy will justify a rate increase to ensure labor market stability and to maintain the Fed's 2% target. The Fed tends to be hesitant to raise what CNN Money called the “benchmark” rate if it sees numbers off the “ideal” mark of inflation. Janet Yellen herself said she remains optimistic about the economy as a whole; noting unlikely severe long-term effects even with the past hurricane season and resultant job loss. Although thousands of jobs were lost and affected communities must recover, Yellen expects job loss to “bounce back.”

While the Fed may not be seeing exactly the inflation rate they expected, rates are expected to rise again at the end of the year, and economic expert Janet Yellen believes that the current strong economy will allow for inflation rates to rise more as expected. Following her logic, should the economy continue its trajectory of low unemployment, job growth, and inflation increases, the Fed's puzzle will soon be no more.