US inflation to fall below 2 per cent target

WASHINGTON: Despite solid growth and continuing job gains, the US economy will see inflation fall even further below the central bank’s two per cent goal, at least for a time, Federal Reserve Chairman Jerome Powell said.
That forecast added weight to the Fed’s recent announcements that it will be “patient” before making any further changes in the benchmark borrowing rate, a stance Powell re-emphasised in semi-annual testimony before the US Senate Banking Committee.
“Recent declines in energy prices will likely push headline inflation further below the… longer-run goal of 2 per cent for a time,” he said.
The US central bank increased the key policy interest rate four times last year but rising uncertainty, especially around the US trade confrontation with China, amplified concerns about slowing global growth and fears the Fed was moving too aggressively.
And with no sign of rising inflation, that prompted the Fed to signal clearly for the past several weeks that it would tread carefully.
Many economists no longer expect any increases this year, while a few say the next move could be a cut if the economy slows further.
Noting the Fed’s preferred annual inflation measure sits at 1.7 per cent, Powell said “the extent and timing of any further rate increases would depend on incoming data and the evolving outlook.” The danger of having inflation continually below the target is that it saps confidence in the Fed’s ability to impact the economy, especially during a slowdown.
But the muted inflation pressures and risks on the horizon mean “this is a good time to be patient and watch and wait and see how the situation evolves,” he said.
Unlike the reaction to some of his comments late last year, markets largely shrugged off Powell’s testimony, to focus on other issues.
He remained upbeat about the economic outlook, saying Fed officials “generally expected economic activity to expand at a solid pace, albeit somewhat slower than in 2018, and the job market to remain strong.” However, “crosscurrents and conflicting signals” pose a potential danger. The “predominant risks… are slowing global growth, particularly China and Europe,” which he cautioned “can create headwinds for the United States economy.” Brexit and ongoing trade negotiations also are issues the Fed “will carefully monitor.”
The United States and China have hammered each other with punitive tariffs on more than $360 billion in two-way trade, raising prices to producers and consumers and undercutting economic growth.
The International Monetary Fund cites the trade war between the world’s two largest economies as a “major risk” to global growth, and cut their growth forecast for this year.
But President Donald Trump on Monday said he expected to hold a “signing summit” soon with China’s leader Xi Jinping to resolve the issue and he pushed back a March 1 deadline which would have triggered tariffs to more than double on $200 billion in Chinese exports.
In the US economy, low inflation and sluggish wage growth — despite net job gains that averaged 223,000 last year and GDP gaining just under three per cent — have continued to baffle economists and the Fed.
Powell noted some signs of stronger wage growth, particularly in lower-skilled jobs, but also said “disparities persist” in the labour market along racial and ethnic lines, and also between workers. — AFP