Despite have spent many years below the Federal Reserve's 2% target, inflation data have been "encouraging" recently and in line with the Federal Open Market Committee's stance that inflation will return to that level in the medium-term, Federal Reserve Bank of Cleveland President and Chief Executive Officer Loretta J. Mester said Thursday.
"Relative to the Fed's 2 percent goal, inflation has been low for quite some time, and while the most recent data are encouraging and consistent with the FOMC's view that inflation will gradually move back to target over time," Mester said, according to prepared text released by the Fed.
Noting that oil prices and other short-term fluctuations have impacted inflation, Mester said, "we have to be careful about thinking of these shocks as independent and just summing their effects."
Noting that price stability and monetary policy "are intimately linked," she said, "setting monetary policy to achieve price stability is not trivial. It requires being able to measure inflation so that we'll know how far we are from the goal. It requires being able to forecast inflation because monetary policy affects the economy with a lag that varies over time and with economic circumstances. It requires understanding the determinants of the monetary policy transmission mechanism. And it also requires having the wherewithal to make decisions under uncertainty."
Despite its importance, Mester said, "one could get pretty discouraged about the state of our knowledge" of measuring inflation, but she would rather move forward "learn to deal with the uncertainty as best we can."
