Janet Yellen Expects Healthy Inflation To Return

Photo: Federal Reserve Twitter page.

WASHINGTON (CNN) — Federal Reserve Chair Janet Yellen gave a glimpse Sunday (Oct. 15) into what she called the most surprising thing about the American economy: the stubbornly low rate of inflation.

Speaking to a group of international central bankers in Washington, D.C. on Sunday, Yellen said she doesn’t expect inflation to continue on its recent anemic trend.

The talk came at a time of heightened political visibility for Yellen, whose term as chair ends in February. President Trump is said to be considering a nominee among a list of five candidates — Yellen among them. Yellen was named by former President Obama.

The appointment of Fed chair is among the most powerful roles the president has in his management of the economy.

Economists look to healthy inflation as a sign of economic stability. Ideally, the Fed wants to see about 2% annual growth. That’s considered the “Goldilocks” rate for inflation: Not too high, not too low.

While the United States was on track to hit that target earlier this year, inflation readings “have been surprisingly soft” lately, as Yellen put it.

“My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year. Most of my colleagues on the FOMC agree,” she said.

But, she conceded, “our understanding of the forces that drive inflation is imperfect.”

Yellen ticked off a few factors that could be behind sluggish inflation:

1) Underemployment: “It is possible that there is more slack in U.S. labor markets than is commonly recognized,” Yellen said.

2) Expectations: Inflation may be kept low because that’s what people expect, Yellen suggested. If people think prices will stay low, they don’t rush out to buy, thus keeping prices low. She said the long-term inflation outlook in other major economies has “edged lower over the past few years” — potentially causing a drag on actual inflation rates.

3) Technology: The Fed’s entire framework for understanding inflation could be off, Yellen said, particularly in light of new technology. She said developments “such as the tremendous growth of online shopping,” could be smothering inflation.

Related: Wall Street loves the Fed and Janet Yellen

Anything off the ideal mark for inflation tends to make the Fed hesitate before hiking its benchmark interest rate.

The Fed set the core interest rate at virtually zero in the wake of the 2008 financial crisis as a way to help kickstart the economy by making it ultra-cheap to borrow money. Low rates are bad news for savers, who see virtually no returns on the cash they keep stashed away.

The central bank has raised the benchmark interest rate three times over the past year as the economy has gotten stronger. Another rate hike is expected in December.

In her speech Sunday, Yellen also expressed optimism about the overall economy despite this year’s devastating hurricane season.

Among the fallout: The United States lost 33,000 jobs in September, marking the first monthly decline in seven years.

“I would expect employment to bounce back in subsequent months as communities recover and people return to their jobs,” Yellen said. “While the effects of the hurricanes on the U.S. economy are quite noticeable in the short term, history suggests that the longer-term effects will be modest.”