Fed's credibility tested as inflation drifts below target
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With the inflation rate about half of the Federal Reserve's 2.0 percent target, the central bank is facing a major test and some experts wonder whether it will eventually need to ramp up its already aggressive bond buying program.
The Fed cut official interest rates effectively to zero in late 2008 during the financial crisis. Since then, it has bought more than $2.5 trillion in bonds to bolster an anemic economic recovery and speed up the decline in unemployment.
Despite those actions, its favored inflation gauge, the Personal Consumption Expenditures (PCE) price index, has fallen to a 3-1/2 year low of 1.0 percent.
Further, by the Fed's own forecasts, inflation is likely to remain short of the central bank's target for years.
"They say that they're going to set monetary policy in a way that ensures future inflation will be 2.0 percent," said Justin Wolfers, an economics professor at the University of Michigan's Gerald Ford School of Public Policy.
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