Low inflation, and the possibility of deflation, presents a daunting conundrum for Fed officials, who have dismissed falling energy prices as transitory despite the fundamental factor of slowing global demand.
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Wall Street has been waiting all year for signs the U.S. central bank would start down the path to normalizing monetary policy by raising rates for the first time in more than nine years. However, liftoff has been delayed as the Federal Open Market Committee has fussed over when conditions will be ideal for the move.
More hawkish members want to raise because they worry the Fed will be too late once inflation accelerates, while also citing the need simply to have wiggle room for policy accommodation that the Fed does not have as long as it keeps its key rate near zero. Futures traders do not believe the Fed will hike until March 2016.
"The real case for worrying about inflation getting too high is materially weaker than it was even three weeks ago," Aaroh Kohli, interest rate strategist at BMO Capital Markets, said in an interview. "I really think they want to go. They will find any ray of sunshine they can. But it's going to be materially harder than they make it out to be."
Unemployment has fallen well below the 6 percent target the FOMC set. However, inflation has remained beneath the level officials would consider ideal for growth, even by the personal consumption expenditures index the Fed prefers to the CPI.
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Amid the conflicting signs, individual members have staged an increasingly public debate over policy direction.
Nonvoting member James Bullard, who heads the St. Louis Fed, is among those pushing for a rate increase, as he believes policy has helped make "cumulative progress toward committee goals," as he said in a speech Tuesday.
Fed Gov. Lael Brainard, who does have a vote on the FOMC, countered that deflationary pressures argue against an increase.
"Our economy has made good progress toward full employment, but sluggish wage growth suggests there is some room to go, and inflation has remained persistently below our target," Brainard said in a speech Monday. "With equilibrium real interest rates likely to remain low for some time and policy options that are more limited if conditions deteriorate than if they accelerate, risk management considerations counsel a stance of waiting to see if the risks to the outlook diminish."
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At its September meeting, the FOMC justified holding off yet again on a hike by citing threats from international developments. However, deflationary pressure at home presents a challenge as well.
September's nonfarm payrolls report, in addition to showing just 142,000 new jobs created, indicated a slight downturn in wages. Economic growth also looks softer, with the Atlanta Fed estimating a third-quarter gross domestic product gain of just 1 percent, well below the current consensus of 2.5 percent.
With economic conditions tightening, Brainard said the net effect of the Fed talking about raising has been the equivalent of two rate hikes. With deflationary pressures building, the case has gotten considerably more difficult for the Fed to move in 2015.
"There certainly has been a tightening of conditions," BMO's Kohli said. "The problem for the Fed is this happened much more quickly than they anticipated."
CORRECTION: An earlier version had an incorrect reference to Lael Brainard's status on the Federal Reserve.