The Federal Reserve’s influential staff seems to have lost confidence that its bosses will achieve the central bank’s 2 percent target, if the minutes of the Fed’s meeting are anything to go by.
The staff forecast presented to policy makers saw inflation falling shy of 2 percent“over the medium term’’ even as the job market was projected to tighten further.
That contrasts with their assessment just a month and half earlier. At the March 19-20 Federal Open Market Committee meeting, staff economists working at the Fed’s Board in Washington predicted that core inflation would instead edge up to 2 percent next year, and stay there in the medium term.
Behind the shift in the outlook: An apparent belief that inflation expectations — which can play a big role in determining actual inflation — have slipped “a bit lower’’ and are now below 2 percent.
“This is a striking assessment that could prove consequential in the dovish direction over the longer haul,” Krishna Guha, head of central bank strategy at Evercore ISI, said in a note to clients.
The latest forecast is important because it serves as a jumping off point for in-depth discussions by Fed Chairman Jerome Powell and his fellow FOMC participants about their economic outlook and monetary policy.
Since introducing its 2 percent target in 2012, the central bank has failed to lift inflation to that level on a sustained basis.
The personal consumption expenditures price index, the Fed’s favourite inflation gauge, rose 1.5 percent in March from a year-ago. The core index, which strips out volatile food and energy costs, increased 1.6 percent.
“Core PCE price inflation was expected to move up in the near term but nevertheless to run just below 2 percent over the medium term,’’ according to the staff forecast at the April 30-May 1 meeting.
“Total PCE price inflation was forecast to run a bit below core inflation in 2020 and 2021, reflecting projected declines in energy prices,’’ the minutes added.