Janet Yellen. Photo: Reuters/Lucas Jackson

Minutes from Fed policy makers’ July meeting suggested that technology and globalization might influence the price level:

Participants discussed possible reasons for the coexistence of low inflation and low unemployment. These included:

  • a diminished responsiveness of prices to resource pressures,
  • a lower natural rate of unemployment,
  • the possibility that slack may be better measured by labor market indicators other than unemployment,
  • lags in the reaction of nominal wage growth and inflation to labor market tightening,
  • and restraints on pricing power from global developments and from innovations to business models spurred by advances in technology.

A couple of participants argued that the response of inflation to resource utilization could become stronger if output and employment appreciably overshot their full employment levels, although other participants pointed out that this hypothesized nonlinear response had little empirical support.

The minutes showed a divide growing between policy makers, as noted by Bloomberg:

* Participants agreed that a fall in long-term inflation expectations would be “undesirable,” though differed in their views about whether inflation expectations were well-anchored

* One person saw stability in measures of expectations in recent months; a few suggested low expectations may have helped put downward pressure on inflation or that expectations might need to be bolstered

* Most participants expected inflation to pick up in the next couple of years, stabilize ~2% in the medium term

** Many said much of the recent decline had probably reflected idiosyncratic factors; even so, PCE price inflation on 12-month basis would likely continue to be held down in 2H.

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