Can we have too little inflation?

by: Henry Meier

Yes we can and it’s the most important metric that the Fed will look at as it moves closer to a likely decision  to start raising short-term interest rates by the middle of the year. That is my main takeaway from the recently released minutes of the Fed’s Open Market Committee, the group that decides what short-term interest rates should be.

Falling energy prices are pushing inflation further below its 2% objective. Falling pump prices keep more money in people’s wallets but they also make a wide range of products cheaper to make and sell.  Normally this is good news but a downward spiral of prices-of the type Europe is seeking to avoid-can have just as pernicious an impact on economic growth as inflation can. Margins get so squeezed that companies can’t cost effectively grow. So you can bet that the Fed won’t raise rates until it knows that inflation is on the way. As the minutes explained:

“A number of participants emphasized that they would need to see either an increase in market-based measures of inflation compensation or evidence that continued low readings on these measures did not constitute grounds for concern”.

Here is a link to the minutes for those of you having trouble sleeping,

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