A Government report on Wednesday showed US inflation at a four-year low, which could allow the Fed to maintain its loose monetary policies.
The report came a day after Federal Reserve chief Ben Bernanke said that the US central bank’s key interest rate could stay near zero even if a stronger economy boosts employment.
The Bureau of Labour Statistics had reported on Wednesday that prices in the United States were down by a seasonally adjusted 0.1 per cent in October — the first drop in six months — as petrol prices fell.
The report was delayed in the aftermath of last month’s 16-day government shutdown.
Consumer price index
For the last 12 months, the consumer price index was up 1 per cent — the slowest pace since October 2009 and well below the Fed’s goal for long-term inflation, around 2 per cent.
So-called core inflation, which excludes volatile food and energy prices, was up 0.1 per cent. Airfares and recreational costs rose, while housing inflation slowed and prices for apparel, household goods and new cars declined.
For the last 12 months, core inflation was 1.7 per cent.
Near-zero interest rate
The fact that the near-zero rate, which facilitates cheap lending, has not caused inflation to soar means the Fed still has room to continue with its loose policies.
For months, the Fed has been eyeing a reduction in its monthly purchases of $85 billion in government-backed bonds.
Meanwhile, the bank’s benchmark Federal Funds rate has been at an unprecedented near zero per cent since December 2008.
In the text of a speech late Tuesday to a group of economists in Washington, Bernanke said that employment has shown “meaningful improvement” since the Fed’s third round of bond-buying since the 2008 financial crisis began.
Fed minutes
In the last Fed meeting on October 29-30, members “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months,” according to minutes released on Wednesday.
Quantitative easing
The latest round of quantitative easing has already pumped $1.2 trillion into the $16 trillion US economy since it was launched in September 2012. In that time, the unemployment rate fell from 7.9 per cent to 7.3 per cent.
The potential tightening of monetary policy in the US comes even as the euro zone continues easing.
The European Central Bank slashed its benchmark refinancing rate on November 7 to a record low of 0.25 per cent, amid disappointing growth, just as the currency area was recovering from its longest-ever recession.
ECB chief Mario Draghi warned of “a prolonged period of low inflation” but denied any risk of deflation, despite record unemployment and inflation at a four-year low in the currency area.
Organization for Economic Cooperation and Development chief economist Pier Carlo Padoan had warned on Tuesday that the Fed’s expected taper of monetary stimulus could hit hard in some developing economies, as spillover investment flows reverse.
In fact, the OECD trimmed its growth forecasts for major emerging economies, including China, India and Brazil.
Stock markets have been jittery since the summer in anticipation of a reduction in Fed bond-buying, which was meant to push money out of safe haven assets in hopes of spurring private investment and growth.
A Bloomberg News survey of 32 Wall Street economists found a median estimate that the Fed would begin tapering its purchases in March. Bond buying could continue at a reduced pace for months or longer.
When the taper does begin “it will likely be because the economy has progressed sufficiently,” Bernanke said.
Interest rates, meanwhile, will remain near zero at least until unemployment falls to 6.5 per cent or long-term inflation expectations exceed the targeted 2 per cent, according to the Fed’s own policy statement.
“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the unemployment threshold is crossed,” Bernanke said.