In Washington today, the Federal Reserve committee responsible for monetary policy kicked off a two-day meeting.
It has been a rocky few weeks since the Fed’s last meeting. There was the government shutdown, of course, and the debate over raising the debt ceiling. Because of that, no one is expecting any big changes from the Federal Open Market Committee after it wraps up its meeting tomorrow, which means the Fed will probably keep buying bonds, putting money into the economy.
But that doesn’t mean the Fed and plenty of economists are not keeping a close eye on inflation.
“Inflation” is a word that, for most of us, does not have positive connotations. Maybe you think of high gas prices or high interest rates.
“The type of concerns that people have about inflation are usually associated with inflation that’s unpredictable, and inflation that’s moving around quite a bit,” says Ann Owen, Henry Platt Bristol Professor of Economics at Hamilton College.
What the Fed wants is some inflation, so long as it is fairly moderate and stable.
“That gives businesses some room to raise the prices on their products,” says Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin Wallace University. “That gives prices on real assets the opportunity to go up, which would make, for example, consumers feel wealthier because their homes are now worth more.”
Moderate inflation can also help the labor market. Owen says that’s because companies dealing with inflation may be able to hire more workers.
“If you are making $10 an hour, and inflation goes up a little bit, the value of what the employer is paying you is a bit less,” she explains.
The Fed has said it wants inflation to be right around two percent. That’s lower than the historical average, which is about three percent.
Owen says that, when it comes to managing inflation, policymakers have a tricky job.
“The concern is that, once you get inflation accelerating, that that momentum is going to keep it going beyond where they want it to be,” she says.