Feeble US inflation: does the Fed still hold temporary factors responsible?

FOR much of this year, the conventional wisdom on Wall Street has been that after seven years of loose monetary policy under which short-term interest rates were pushed to near zero, the US Federal Reserve would take the first steps towards raising the federal funds rates before end-2015.

Those expectations have been driven by recognition that with the unemployment rate falling steadily, reaching 5.1 per cent in September, the Fed's aggressive monetary strategy seemed to have achieved one component of the Dual Mandate that Congress assigned to it in 1977, "to promote effectively the goals of maximum employment".

At the same time, when it came to the second part of their mandate, which was to promote "stable prices and moderate long-term interest rates", the assumption embraced by top Fed officials has been that a more bullish labour market coupled with other indications that the economy was expanding would put upward pressure on wages and prices and ignite inflationary pressure. At that point, in response to rising consumer price inflation - which has been expected to slowly rise to 2 per cent in 2015 - a rate increase would become inevitable.