PALO ALTO, Calif. — Federal Reserve officials are walking a narrow line, trying to convince the public that they’re committed to coaxing prices and wages higher without inspiring investors to expect interest rate cuts.
The central bank aims for 2 percent inflation, a level that’s low enough for consumer comfort but high enough to guard against economy-damaging price declines. The Fed has struggled for years to hit that target.
Price increases excluding volatile food and fuel came in at just 1.6 percent for the year through March, and consumer expectations for inflation have been hovering at low levels. Those developments have caught the White House’s attention: Earlier this week, President Trump cited low inflation in urging the Fed to cut rates and inject some stimulus into the economy. On Friday, Vice President Mike Pence said in a CNBC interview that it “might be time” for the Fed to consider cutting rates because “we just don’t see any inflation in this economy at all.”
The Fed indicated this week that it was not ready to cut — or raise — interest rates, and Fed Chairman Jerome H. Powell said he expects price gains to eventually emerge. But ongoing weak inflation spurred Fed regional presidents Charles Evans and James Bullard to sound a cautious tone, even as they, too, urged inaction.
“Core inflation has retreated to relatively low levels over the past three months, elevating my concerns over the outlook for inflation,” Mr. Evans, head of the Federal Reserve Bank of Chicago, said in remarks prepared for delivery in Stockholm on Friday. “There is the distinct risk that inflation expectations are too low and will be slow to recover to levels that are consistent with our symmetric 2 percent goal.”
Mr. Bullard, who leads the Federal Reserve Bank of St. Louis, said in an interview that this was a good moment to “wait and see” how the economy evolved after the Fed’s recent decision to hit pause on future rate increases. It makes sense, he said, to wait and watch “through the second quarter.”
However, he is concerned that inflation is running lower than he would expect.
“It would be possible to make another easing move at some point, which would re-center inflation expectations at 2 percent,” Mr. Bullard said. “That might be a great thing to do while the economy is running well.”
Before this week’s Fed meeting, which left interest rates unchanged, investors had begun to expect that the Fed might signal a rate cut in an effort to lift prices. Markets gyrated on Mr. Powell’s declaration that the central bank will continue its wait-and-see approach for the foreseeable future.
Richard Clarida, the Fed’s vice chairman, reinforced that message on Friday, saying the current economic situation is enabling a patient stance.
The economy is “operating at or very close to the Fed’s dual-mandate objectives” of full employment and stable inflation, Mr. Clarida told a crowd of academic and central bank economists gathered at Stanford University. The Fed can afford to watch data “as we assess what, if any, further adjustments in our policy stance might be required.” The volley of Fed commentary came after government data released on Friday morning showed that unemployment fell to 3.6 percent in April, the lowest level since 1969.
That should bode well for the Fed as it tries to maneuver prices higher — in theory. If labor markets are tight and employees are hard to find, businesses might lift wages to attract and retain talent. At the same time, strong demand may give companies the pricing power they need to charge more and cover their costs. Yet the process has been slow to kick in so far this cycle. The Fed hasn’t hit its price goal sustainably or symmetrically — meaning that overshooting is as common as undershooting — since formally adopting it in 2012.
Although the Fed did meet that target a handful of times in 2018, the more robust increases were short-lived and driven by components that aren’t closely tied to the business cycle, meaning they’re not the ones that the Fed influences most strongly.
Mr. Evans, who has at times been a bellwether for Fed policy, said that he still expects core inflation to recover despite his growing unease. He too reiterated Mr. Powell’s message: In an uncertain world, patience is the watchword.
He even hinted that a rate increase remains possible this year.
“The risk-management posture the FOMC is taking today is not unusual,” he said. “Whether this leads to further rate hikes later this year or not will depend on how the current uncertainties are resolved.”
