CLEVELAND — Federal Reserve Chairwoman Janet L. Yellen told a meeting here that the Fed plans to continue raising its benchmark interest rate even though recent inflation numbers have not hit targets the central bank has been looking for.
In remarks to the National Association for Business Economics, Yellen said the Fed continues to expect inflation will slowly rise toward its 2% annual goal, in large part as the supply of available workers helps to drive wage increases.
“Given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2%,” Yellen told the meeting.
When 2017 began, most economists expected the Fed to increase rates four times this year; to date, it has done so twice, with the benchmark rate now at a range between 1% and 1.25%. For the past five years the annual inflation rate has failed to hit the 2% target rate.
Yellen suggested that low inflation has been the result of price pressures, and she cited a price war among providers of cellphone plans as one example. Still, she acknowledged economists remain unsure why inflation has not risen more quickly in 2017, although she cited three potential explanations, according to The New York Times:
- The low unemployment rate is a misleading measure of the health of the labor market because it does not account for the recent increase in the share of American adults who are neither working nor looking for work.
- The possibility that Americans are losing confidence that the Fed will return inflation to a 2% pace has diminished expectations are weighing on the actual pace of price inflation.
- Changes in the structure of the economy, such as slower growth in healthcare costs, might be weighing on inflation.