(Bloomberg) — Federal Reserve policy makers may need to have more than just confidence that inflation will pick up to raise interest rates again after liftoff.
Chair Janet Yellen on Wednesday suggested that the pace of future rate increases could depend on “actual progress” in price gains toward the central bank’s target. That’s a shift from the requirement the Federal Open Market Committee (FOMC) set for an initial move, to be “reasonably confident” that inflation would move back to its goal over the medium term.
The language adds to reasons to expect that rates will rise gradually after a widely-anticipated liftoff later this month. As measured by the personal consumption expenditures price index, the Fed’s favorite gauge, headline inflation climbed just 0.2 percent in the year through October. So-called core prices, which strip out volatile food and energy costs, rose 1.3 percent.
“Given the persistent shortfall in inflation from our 2 percent objective, the Committee will, of course, carefully monitor actual progress toward our inflation goal as we make decisions over time on the appropriate path for the federal funds rate,” Yellen told the Economic Club of Washington on Wednesday.
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While the FOMC is ready to raise rates later this month with “little tangible evidence” of increasing inflation, Yellen indicated that policy makers probably will need more direct proof it’s begun to climb in order to tighten further, said Krishna Guha, vice chairman of Evercore ISI in Washington.
“This means that the bar for the second and subsequent hikes is higher than for the first hike,” Guha said in a note to clients.
Policy makers reduced their target for the fed funds rate to a range of zero to a quarter percentage point in December 2008 and have held it there ever since. They next meet to map out policy on Dec. 15-16 in Washington.
In her speech, Yellen argued that both overall and core inflation have been temporarily depressed, the former by a sharp fall in energy prices and the latter by a stronger dollar that’s pushed down the costs of imports.
Taking account of those effects, “it appears that the underlying rate of inflation in the United States has been running in the vicinity of 1.5 to 1.75 percent,” she said.