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At this week's confirmation hearing of Jerome Powell for Federal Reserve chairman, his views on inflation may now be question No. 1.
Powell is scheduled to testify on Tuesday before the Senate Banking Committee, and the inflation issue has now become more important after comments last week by current Fed Chair Janet Yellen. She expressed increasing doubts about the inflation outlook, saying she expects it "to move back up over the next year or two" toward the Fed's 2 percent goal.
But, she added, "I will say I'm very uncertain about this."
That's a change for Yellen, who has insisted for most of this year that persistently low inflation rates were transitory. The Fed's preferred inflation indicator, the core personal consumption expenditures (PCE) index, which excludes food and energy, has fallen from 1.9 percent a year ago to just 1.3 percent in September. It's shown little sign of a rebound even while unemployment has dropped and growth has picked up.
Yellen is now concerned that there are longer-term trends at work, and suggested that those concerns are shared by others at the Fed. "My colleagues and I are not certain that it is transitory,'' Yellen said in a speech Tuesday at New York University's Stern School of Business.
That raises the question of what Powell now believes. A Fed governor for the past five years, Powell has expressed some concerns about low inflation but hasn't yet gone as far as Yellen. In an Aug. 25 CNBC interview, Powell called low inflation "kind of a mystery."
Given low unemployment, Powell said he would expect higher readings. He added that low inflation numbers give the Fed "the ability to be patient" in raising rates.
That was a small change from his more definitive assertion in June that "there are good reasons to expect that inflation will resume its gradual rise." Powell does not appear to have spoken on the issue since his Aug. 25 CNBC interview. His last speech on monetary policy was June 1.
In that speech, Powell supported the Fed doctrine of symmetry around its inflation objective. That is, Fed members have agreed to be as concerned with inflation that runs persistently above or below its target. For policy, that should mean the Fed would just as soon either not hike or cut rates in the face of low inflation as it would hike if inflation were too high.
Powell's views have generally followed Yellen and the consensus, and there's no reason to believe he will challenge current doctrine. But Powell, who is not an economist, hasn't yet had an opportunity to show his own ability to develop doctrines and policies that differ from the consensus. A former private equity banker, Powell may well be tested on the job if, as appears to be the case now, economic developments defy historical precedent.
If inflation remains low while the unemployment rate continues to fall, it may not be long before Powell will have to devise his own unconventional policies and doctrines for handling a set of difficult and unconventional economic outcomes.