Janet Yellen and the Case of the Missing Inflation

Using the economic models on which the Fed has traditionally relied and which were taught to generations of undergraduates, that would seem to set the stage for higher inflation. Employers would compete for workers and hike wages, fueling broader price increases for all types of goods and services.

But there is little evidence this cause-and-effect is actually happening.

The Fed has defined stable prices as inflation of 2 percent. Right now, not only are key inflation measures below that level, but they are also falling. The most recent reading of the inflation measure favored by the Fed is at only 1.5 percent. And the Consumer Price Index, excluding volatile food and energy prices, rose 1.7 percent over the year ended in May, down from 2.2 percent in February.

In other words, the jobs side of the mandate would seem to offer Ms. Yellen and her colleagues a green light to raise rates steadily to keep the economy from overheating, while the inflation side would seem to offer instead a yellow light, and arguably a red one.

But at Wednesday’s meeting, only one official with a vote dissented from the rate increase: the Minneapolis Fed president, Neel Kashkari. Moreover, 12 of 16 Fed officials think that at least one more rate increase this year would be justified, based on newly released projections the central bank released.

This sure looks like a central bank that has set its course for 2017 and will continue on it unless strong evidence emerges that it has misread the state of the economy. The line between intellectual confidence and mere stubbornness can be thin, however.

Ms. Yellen emphasized that monetary policy “is not on a preset course” and that she and her colleagues “have taken note of the fact that there have been several weak readings” on inflation lately.

But, she added, “it’s important not to overreact to a few readings, and data on inflation can be noisy.” Twice, she mentioned factors that…

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