Rate-Hike Patience May Leave Fed in a Bind If Inflation Softens
If price gains would slow down even as U.S. economic growth more broadly held up, it could put the central bank in a tough spot. Officials have already placed interest-rate hikes on hold amid muted price pressures and looming global risks. They could
extend that pause, pledging to keep rates low until faster price gains materialize. But economists said actually lowering rates on an inflation miss seems unlikely, because it could signal undue pessimism.
“The hurdle for a policy inflection point is fairly high,” said Lou Crandall, chief economist at Wrightson ICAP in New York. “If you ease, you trigger the, ‘what does the Fed know that we don’t?’ trade.”
The stakes are significant. The Fed hasn’t hit 2 percent inflation on a sustained basis since formally adopting it in 2012. Officials had been hopeful that this would be the year in which they finally clinched their objective.