IW monetary outlook October 2015. Low inflation: A challenge for central banks

Michael Hüther and Markus Demary

No 33/2015E, IW policy papers from Institut der deutschen Wirtschaft (IW) / German Economic Institute

Abstract: The European Central Bank (ECB) as well as the Federal Reserve Bank (Fed) are currently challenged by inflation below their inflation targets. While the Eurozone recovery is still anemic, the US economy is growing and the labor market improved, such that the Fed now fulfills one target of its dual mandate of stabilizing inflation and maximum employment. While consumer price inflation is low in the US, core inflation remained stable in during the last year. Because of the improved labor market towards near full employment we expect the Fed to conduct an interest rate lift-off. Given the current effective federal funds rate of 0.14 percent, an increase of the federal funds target corridor to 0.25 to 0.50 percent in December 2015 seems possible without endangering growth. It will be a strong signal that the Fed is confident that the economic recovery is strong enough to bring inflation back to its target value in the next year. However, we expect the Fed to abstain from further interest increases until the second half of next year due to the still low inflation rate. [...]

JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cba and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwkpps:332015e

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