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Fed Needs to Adjust Its Inflation Targets, Two Economists Say

The Federal Reserve should adjust its inflation expectations considering current economic factors, two economists told Liz Claman on “Morning Call.”

The Labor Department on Friday said wholesale prices jumped 1% in March, due to rising energy and food prices. Core inflation, meanwhile, came in flat.

“My concern in this whole discussion is the whole issue of what is a reasonable range for the Fed,” said Joel Naroff, chief economist at Commerce Bank. “The problem is that we rarely have inflation, a core inflation below 1.5% and almost never have it below 1% so I think the Fed has got a problem here.”

“If they had a more reasonable inflation range, like 1.25% to 2.25%, or 1.5% to 2.5%, we wouldn’t be talking about this right now,” he added.

“The Fed has clearly stated to us that the prime concern is inflation, and today’s Consumer Sentiment Index out of Michigan University that’s a preliminary view on April did show that the inflation expectations for households were up. That is a worrisome development,” said Kathleen Stephansen, director of global economic research at Credit Suisse.

But the Fed should stay pat on interest rates, despite concerns over declining productivity and rising labor costs, analysts say.

“The Fed is looking at the fact that the economy is really undergoing some major inventory correction and while that is going on in housing and manufacturing, the Fed really can’t do anything,” Stephansen said.