The Fed should go on with its step-by-step rate rises regardless of the unclear situation with the inflation, said J. Yellen on Tuesday.
There is a chance that the Fed could have misspecified inflation models and misjudged major data as the stabilizing power of the jobs market and the anticipations for inflation, whether they are stable enough, and central bank officials need to heed to that when making policy decisions, she pointed out.
She believes that low inflation lately was a result of certain issues that would change and it is merely a matter of time and regardless of uncertainties it wouldn’t be correct to pull back monetary policy till inflation makes its return to 2%.
Small hikes of the federal funds rate are necessary, otherwise jobs market could become overheated, possibly causing problem with inflation in the future and the it would be hard to find other solution than to resort to recession triggering, said J. Yellen.
With her words she tried to bring to an end a debate dividing central bank policy-makers in two groups - those concerned that inflation could be steadfastly stuck lower than the Fed’s target of 2% due to structural modifications in the world economy, and those who is of view that it’s just temporary and soon tight job markets would drive wages and prices upward.