HomeFederal ReserveUS Inflation Remains 'Subdued', Says Fed

US Inflation Remains ‘Subdued’, Says Fed

The Federal Reserve ended its two-day meeting Wednesday, and as expected the Federal Open Market Committee (FOMC) did not raise interest rates. Further, in an exact parallel to its last statement, it noted that US inflation remained under control, stating:

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

September inflation data indicated that consumer prices declined 1.3% during the prior 12 months and that core annual inflation, which excludes volatile food and energy prices, rose just 1.5% — well within the Federal Reserve’s comfort range of between 1%-2%.

It appears its benchmark federal funds rate will remain virtually at zero for some time as the "economic activity is likely to remain weak for a time," according to the FOMC.

"The one consistent theme with all the Fed speakers is that they’re not going to raise rates any time soon," Drew Matus, an economist at Bank of America-Merrill Lynch, was quoted on NYTimes.com. "That is the one consistent theme that gets hammered home time and again."

In a unanimous vote, the FOMC decided to keep its key rate unchanged in a range of zero to 0.25 percent.

The released Fed statement follows in its entirety:

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.



  1. It’s hard to determine what “subdued” means to the Fed. If you use the break-even inflation rate to determine expectation we examine the spread between the ten year treasury and the ten year TIP it was 2.13% as of November 17. That number, however understates inflation by 25 to 50 basis points because Treasurys can trade at special rates while TIPs do not. To estimate current inflation, i.e. first derivative inflation I look at the change in the CPI-U, all-items from its trough in December 208 to present. It changed from 211.577 to 216.385 in ten months to give us an annualized rate of 2.73%. Since the past ten year rate of inflation is 2.87, For the PPI its all-items, current inflation rate at the wholesale level is 3.18%. I can hardly see that inflation is “subdued”.

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