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The Journal Gazette

Thursday, October 12, 2017 1:00 am

Low inflation causing debate over interest rate hike

MARTIN CRUTSINGER | Associated Press

WASHINGTON – Federal Reserve officials struggled in September to come to terms with persistently low inflation but decided to continue to signal the possibility of raising interest rates for a third time this year.

The minutes of their most recent policy meeting released Wednesday show that a group of Fed officials expressed concern that low unemployment could cause inflation to surge and a rate hike was needed, presumably when it meets in December. Another group suggested that no further rate increases were called for in the near term.

Investors, though, have settled around the notion that a December rate hike is all but guaranteed. The latest CME Group survey, based on trading on the direction of the Fed's benchmark rate, places the probability of a December rate hike at 88 percent.

But some economists express more uncertainty. They think the Fed might not raise rates by year's end unless economic reports between now and its Dec. 12-13 meeting show that inflation has begun to edge up toward the Fed's 2 percent target.

“The Fed is clearly inching closer to pulling the trigger for a third rate hike this year, but that doesn't seal the deal,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

“At the moment, the minutes say several members say the outlook is uncertain and another rate hike this year will depend importantly on whether inflation shows signs of strengthening,” Rupkey said.

Chair Janet Yellen and other Fed officials earlier this year pointed to transitory factors, such as falling prices for cellphone plans, to help explain why inflation was likely moving farther below the Fed's 2 percent inflation goal. But with undesirably low inflation persisting, she and other officials have recently acknowledged that perhaps something more long lasting may be happening.