Monetary policy “appears to be far from causing excessive inflation” and price increases are likely to remain slow through the end of 2016, according to research by the Federal Reserve Bank of San Francisco.
It’s also more probable that inflation will remain below the central bank’s 2 percent inflation goal than rise above it, according to a report published Monday by Vasco Cúrdia, a senior economist at the regional reserve bank.
“Persistent effects from the financial crisis are the main reason inflation is expected to remain low for so long,” Cúrdia wrote. “The financial crisis disrupted the credit market, leading to underinvestment and underutilization of resources in the economy. This slowed the economic recovery and pushed inflation down more than 2 percentage points.”
Low inflation gives the Fed more room for accommodative policy even after holding the main interest rate near zero since December 2008. The personal consumption expenditures index, its preferred price gauge, rose 1.4 percent in September from a year earlier and gains haven’t exceeded 2 percent since March 2012.
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“Inflation is not expected to surge in the near future,” according to Cúrdia. “The risk of high inflation in the next one to two years remains very low by historical standards.”
Cúrdia said he used a model that accounts for different aspects of monetary policy, including interest rates as most models do, while also incorporating inputs based on large-scale asset purchases and forward guidance about keeping rates low.
“The model explicitly accounts for all policy tools the Fed has used recently,” Cúrdia wrote in the report. “According to the model, there is little evidence that monetary policy constitutes a major source of inflation risk.”
He said the model shows “risks to the inflation outlook remain tilted to the downside” and suggests that forces keeping inflation low should be transitory. Monetary policy “played a stabilizing role in the recent past” by preventing inflation from falling further below the Fed’s 2 percent target.
PCE inflation fell to a four-year low of 0.9 percent in October 2013. Minneapolis Fed President Narayana Kocherlakota has said he doesn’t expect it to return to 2 percent until 2018.
He cast the only dissent at the last Federal Open Market Committee meeting Oct. 28-29, later saying he wanted a stronger commitment to getting inflation up to 2 percent, and that bond buying should have been continued for longer. The Fed ended its third round of purchases last month after pushing the balance sheet to a record $4.49 trillion.