Inflated expectations: big weight on small indicator
The U.S. Federal Reserve has signaled inflation expectations will play a key role in future decisions about interest rates, placing ever greater emphasis on an elusive concept that has proven difficult to measure.
Like many policy-makers around the world, Fed officials have been taken aback by the relentless surge in oil prices. They are hoping such spikes will not make Americans too accustomed to faster price increases.
If consumers and businesses begin to take such inflation for granted, the Fed fears, they might set off a self-reinforcing cycle of demands for better wages and costlier products.
“The upside risks to inflation and inflation expectations have increased,” the policy-setting Federal Open Market Committee said as it wrapped up a two-day meeting on Wednesday, at which it decided to keep its benchmark interest rate steady.
For now, the U.S payday advances. central bank appears to hope tough talk can help tamp down these tendencies, avoiding the need for a near-term increase in borrowing costs.
While expectations are seen as a key ingredient in the future rate of inflation, economists caution a policy that relies heavily on measuring them has its perils.
“Conceptually it’s very powerful, everybody can agree this is a big deal. But there’s a lot of wiggle room for how that gets executed,” said Lakshman Achuthan, managing director at the Economic Cycle Research Institute.
Because gauging consumer and business psychology is difficult, the Fed risks either underplaying or overstating the case for higher rates. In either instance, the repercussions could be costly.