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For Fed, low inflation still a likely foe: study

Tuesday, November 18, 2014 - 06:37
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The Federal Reserve two years from now is twice as likely to be battling low inflation as high inflation, according to research published on Monday by the San Francisco Fed.

[SAN FRANCISCO] The Federal Reserve two years from now is twice as likely to be battling low inflation as high inflation, according to research published on Monday by the San Francisco Fed.

The study, penned by San Francisco Fed senior economist Vasco Cúrdia, suggests that continued easy monetary policy is unlikely to spark the run-up in inflation feared by some policymakers. By late 2016, the study found, the chance that inflation will be above 3 per cent is 16 per cent or less.

The likelihood it will be below 1 per cent is about 30 per cent.

Historically, the probability of high future inflation has outstripped the likelihood of low inflation. But since the 2008 financial crisis and the Fed's massive efforts to boost the economy, the situation reversed. "Monetary policy appears to be far from causing excessive inflation under present circumstances," Curdia wrote.

While inflation increased in the first half of 2014, it has now slowed to about half a percentage point below the Fed's 2-per cent target. "We should not see inflation begin to recover more firmly until around the end of 2015," Curdia said.

The study may help bolster the arguments of some Fed officials, including San Francisco Fed chief John Williams, that the US central bank can remain patient on raising interest rates even as unemployment falls more quickly than expected.

The Fed has kept rates near zero since December 2008.

REUTERS