Federal Reserve Chair Janet Yellen made clear two things this week. First, that her and her colleagues are somewhat confounded by the inflation data. And second, that confusion does not yet deter them from their plan for gradual rate hikes. December is still on.
The basic operating framework in Yellen’s speech Tuesday follows that of her speech of September 2015 (where, ironically, she defended the beginning of this tightening cycle that was subsequently put on hold by a slower economy). She decomposes inflation into a function of food and energy prices, inflation expectations, labor market slack, import prices, and ‘other factors’. Under this decomposition, the ‘other factors’ term this year is unusually large and negative, as illustrated by Yellen’s chart 3.
This post was published at FinancialSense on 09/28/2017.
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