Business

What worries the Fed? Too little inflation

For the second time since raising its target interest rate ever so slightly, the Federal Reserve’s Open Market Committee will be back around its conference table in the week ahead. It’s not expected to do much, as it works hard at doing nothing.

Last December, when the Fed changed course after eight years of holding interest rates at zero, it was confident enough in 2016 to signal it would be raising rates again this year. The bond market priced in as many as four interest rate hikes before year-end. But then the stock market dove, oil prices collapsed and global economic growth slowed. Very quickly, the number of expected rate hikes this year was cut in half – from four to two. Pricing of future bonds indicates the market thinks there may be only two small rate hikes over the course of the next two years. That’s a big slowdown in the pace of rate hikes predicted just three months ago.

Why? After all, job growth has been steady, U.S. stocks have recovered somewhat from the early 2016 sell-off and general economic activity is thought to have picked up after a sluggish end to 2015. It’s inflation – or the lack of inflation – that remains the worry.

Low inflation can be corrosive to consumer spending by rewarding inaction. Why buy today when prices will drop tomorrow? In an economy dominated by consumers, that is a financial spiral the Fed wants to avoid. By doing nothing by the end of its two-day meeting on Tuesday and Wednesday, the central bank hopes its policies are working.

Financial journalist Tom Hudson hosts "The Sunshine Ecnoomy" on WLRN-FM in Miami. Follow him on Twitter @HudsonsView

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