Fed's Mester unmoved by weak US inflation

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Gold was sold earlier in the week amid comments from Federal Reserve officials indicating a willingness to raise interest rates four more times by the end of next year. "The current level of the USA policy rate is likely to be appropriate for this regime over the forecast horizon". A more important reason for the Fed to raise rates further is the U.S. government's plans to implement accommodation on the fiscal side, in the form of tax cuts and greater budget spending, and normalcy in monetary conditions is a must.

A weaker dollar also helped gold prices higher.

"It is far from clear that a goal of monetary policy is to cause a deterioration in these aspects of financial markets".

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Fed Chairwoman Janet Yellen, New York Fed President William Dudley and Cleveland Fed chief Loretta Mester view the recent sluggishness as probably temporary, driven by some one-time factors such as new, more generous cellphone plans and slower growth in prescription drug prices. "If the labor market continues to tighten, wages will gradually pick up, and with that we'll see inflation get back to 2%", he said. "The underlying economic fundamentals are pretty good right now". Because the Fed raised rates the same day inflation disappointed again, they said it's natural for the markets to worry that the central bank made a policy error.

"Many future developments could impact this policy path, but the Fed does not need to pre-empt any of them", Bullard said during his presentation at the Illinois Bankers Association conference in Nashville. "The FOMC (Federal Open Market Committee) can wait and see how key macroeconomic developments play out in the quarters ahead".

Partisan politics in Washington do not make it any easier for the White House on top of that all, meaning the U.S. economic reform is likely to go all swings and roundabouts, and might get painful at times, in the form of a short recession even, should worst come to worst. But the Fed fails to recognize that favorable supply-side forces can keep inflation below its sacrosanct 2% target: forces such as increased.

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