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The Federal Reserve appears to be backing away from its commitment to keep inflation at 2 percent with its plan to buy mortgage-backed securities until employment improves, two former Fed officials said.
“The message that I took” from the central bank’s Sept. 13 announcement of a third round of bond buying is “we want the inflation rate to go higher,” said Dino Kos, managing director at Hamiltonian Associates Ltd. in New York and a former New York Fed executive vice president. “It’s a historical shift from where they had been to where they seem be to going.” The Fed committed in January to a 2 percent inflation goal.
The policy-setting Federal Open Market Committee said it will buy $40 billion of mortgage bonds per month and possibly purchase even more assets until the labor market improves “substantially.” The central bank in a statement didn’t specify its commitment to act “in a context of price stability,” even though in January it unveiled for the first time an inflation target, according to Marvin Goodfriend, a former research director at the Richmond Fed.
“You have to look hard to find any mention of inflation” in the FOMC’s Sept. 13 statement, Goodfriend, a professor at Carnegie Mellon University in Pittsburgh, said. Both Goodfriend and Kos were interviewed on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “There ought to be a follow-through on the explicit 2 percent inflation objective” in the Fed’s next statement after its Oct. 23-24 meeting.
The consumer-price index increased 0.6 percent in September for a second month, the Labor Department reported yesterday. Economists surveyed by Bloomberg had forecast a 0.5 percent advance. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.1 percent, less than projected.
The Fed in its “open-ended prescription” for bond purchases risks kindling investor anxiety that inflation will accelerate, a sentiment that can arise “all of a sudden,” Goodfriend said.
“This Fed is following two decades of inflation stability that it could anchor its policy to for the future,” Goodfriend said. “It seems to be throwing that away with this particular walking away from the January 2012 statement.”
“People will be guessing” if the Fed fails to publicly clarify its policy, Kos said.
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