Inflation: Politics or Economics?

Federal Reserve

The president of the Philadelphia Federal Reserve, Charles Plosser, spoke Friday on the future plans of the central bank, noting that it could be “aggressive” in going after goals to raise interest rates. According to MarketWatch, Plosser voiced the possibility that if the Fed funds rates is below 2 percent, it could cause problems even if the job market sees improvement and unemployment numbers decrease.

While lifting rates apparently might be a necessary act, Plosser said it would be a difficult political move for the Fed. “Technically we can certainly do that, but it will be a question of will,” Plosser said, according to MarketWatch. Also on the minds of the Federal Reserve are asset prices and leverage, and Plosser said the Fed is working to avoid “frothiness” in the market by monitoring them carefully.

These concerns come in the wake of the Fed’s bond-buying stimulus taper, which began just prior to the new year. The $85 billion asset purchase plan was reduced by $10 billion, to $75 billion per month.

The official statement of the U.S. Federal Reserve revealed a degree of concern about inflation as well, noting that “inflation persistently below its 2 percent objective could pose risks to economic performance.” Yet while it’s been decided that low inflation could be problematic, that doesn’t make policy changes simple or obvious for those working to stabilize and improve the health of the economy.

Janet Yellen, soon to be chair of the Fed, pending confirmation, discussed the difficult political situation surrounding intentionally lifting inflation rates in the U.S. “If you just went out and said you’re trying to raise inflation expectations, the average household would just think, ‘Oh my god, we have so many problems already, and now you want to make the cost of everything higher?’ I don’t think that’s confidence-inducing,” Yellen said, per The Wall Street Journal.