Inflation rate hovers at half of target, Wolfers weighs in on Fed's next move

May 8, 2013

The current inflation rate is at half of its 2 percent target, Reuters reports, which is a "major test" for the Federal Reserve. The article also reports that the inflation rate is likely to remain short of target for several years.

Since the financial crisis in 2008, the Fed has bought nearly $2.5 trillion in bonds in order to jumpstart a lagging economy. Despite this, however, the Personal Consumption Expenditures price index (PCE)—on which the Fed heavily depends to gauge inflation—has fallen to 1 percent, the lowest in more than three years.

Economist Justin Wolfers notes that "They say that they're going to set monetary policy in a way that ensures future inflation will be 2 percent. Right now, they expect it to be lower than that, and unemployment to be unconscionably high, so the Fed's own framework says that they need to take more stimulative action."

The article reports, however, that the central bank doesn't seem worried about deflation. The Fed announced in April that it intends to continue buying bonds at $85 billion per month.