The moribund inflation seen in the world's largest economy over the last year is a "mystery," a "surprise" and a "concern" all at once, in the words of U.S. central bank chief Janet Yellen. And the dilemma - why price pressures have not picked up despite nearly a decade's worth of falling unemployment and growth - will be squarely at the fore when Federal Reserve policymakers gather tomorrow for a two-day meeting in Washington.
If futures markets are to be believed, the Fed will take no action on benchmark interest rates at the meeting, leaving the target range unchanged at between 1 percent and 1.25 percent. But it expects to adopt a rate hike in December, its third of the year, to ward off inflation that perpetually seems to be just around the corner.
Hovering over the Fed's deliberations will be President Donald Trump's decision, also due next week, on whether to replace Yellen, whose term as chair expires in February. But on Wednesday all eyes will be looking for clues about what the Fed will do next. And the camp that favors a rate increase likely got a boost on Friday when official figures showed the U.S. economy beat expectations, growing at a 3 percent clip in the third quarter despite the pounding taken by the commercial and industrial hubs battered by Hurricanes Irma and Harvey. But after the Fed's most recent meeting, Yellen acknowledged that growth and job creation had not produced the inflation that long-prized economic models say it should, leaving central bankers in an increasingly uncomfortable quandary.
"It was pretty understandable until this year," Yellen told reporters. "But this year, it's been a surprise." According to Yellen, she and most of her colleagues on the Federal Open Market Committee, which sets U.S. monetary policy, now "guess" that inflation will begin rising next year and hit their two percent target by 2019. But an increasingly vocal minority on the committee say this expectation looks less like sound forecasting based on hard numbers and more like an untested article of faith. The Commerce Department today is due to release a new batch of closely watched inflation figures but whatever the outcome it is unlikely to change the overall picture so far.