The Federal Reserve Bank’s target inflation rate of two percent has been an important threshold in the discussion of whether it should raise interest rates.
Core consumer prices, excluding volatile items like food and energy, did hit that two percent annual growth rate mark for the year ending in November.
But the Fed’s preferred measure of inflation, personal consumption expenditures, hasn’t hit two percent.
So why’s the Fed talking about raising rates?
Some industry watchers suspect that price declines in sectors like energy and health care may not continue, portending more inflation.
What’s more, they noted several parts of the economy are heating up.
“We think cost pressures are building, especially on the wage front. We hear a lot of evidence from clients and business owners about the difficulty of hiring qualified workers,” said Dan Heckman, national investment consultant with U.S. Bank Wealth Management.
Heckman said price spikes could be lurking behind what have been relatively low inflation numbers and that the Fed may want to raise interest rates to curb big spikes.
But Gary Stern, the former head of the Minneapolis Fed, said the more important consideration is the Central Bank’s success in meeting its dual mandate: keeping unemployment low and prices stable.
He said raising rates is really about preserving recent achievements on those fronts.
“This a good time to start what I would call an inevitable adjustment,” he said. “No, it’s not urgent. But you don’t want to wait till it’s urgent because then, for sure, you will have waited too long.”
Stern added that there’s no strong reason the Fed should wait to raise rates until both inflation measures hit two percent.
“I don’t want to be too cute about this, but there’s a certain arbitrariness to picking two percent,” he said. “If it were me, I’d rather be a little bit below it than above it.”
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