Minutes of the Federal Open Market Committee
October 31–November 1, 2017
However,
many participants observed that there was some likelihood that inflation might
remain below 2 percent for longer than they currently expected, and they
discussed possible reasons for the recent shortfall.
Several
participants pointed to a diminished responsiveness of inflation to resource utilization,
to the possibility that the degree of labor market tightness was less than
currently estimated, or to lags in the response of inflation to greater
resource utilization as plausible explanations for the continued soft readings
on inflation.
In
discussing the implications of these developments, several participants
expressed concern that the persistently weak inflation data could lead to a
decline in longer-term inflation expectations.
In
their comments regarding financial markets, participants generally judged that
financial conditions remained accommodative despite the recent increases in the
exchange value of the dollar and Treasury yields.
In
light of elevated asset valuations and low financial market volatility, several
participants expressed concerns about a potential buildup of financial
imbalances. They worried that a sharp reversal in asset prices could have damaging
effects on the economy. It
was noted, however, that elevated asset prices could be partly explained by a
low neutral rate of interest.
A
number of these participants were worried that a decline in longer-term inflation
expectations would make it more challenging for the Committee to promote a
return of inflation to 2 percent over the medium term. These participants’ concerns
were sharpened by the apparently weak responsiveness of inflation to resource
utilization and the low level of the neutral interest rate, and such
considerations suggested that the removal of policy accommodation should be
quite gradual.
In
contrast, some other participants were concerned about upside risks to
inflation in an environment in which the economy had reached full employment
and the labor market was projected to tighten further, or about still very
accommodative financial conditions. They cautioned that waiting too long to
remove accommodation, or removing accommodation too slowly, could result in a
substantial overshoot of the maximum sustainable level of employment that would
likely be costly to reverse or could lead to increased risks to financial
stability. A few of these participants
emphasized that the lags in the response of inflation to tightening resource
utilization implied that there could be increasing upside risks to inflation as
the labor market tightened further.
One
question, for example, was whether a framework that generally sought to keep
the price level close to a gradually rising path—rather than the current approach
in which the Committee does not seek to make up for past deviations of
inflation from the 2 percent goal—might be more effective in fostering the
Committee’s objectives if the neutral level of the federal funds rate remains
low.
Dr. Engin YILMAZ
Ankara
23.11.2017
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