Inflation in the U.S. rose in the year that ended in January by 2.5 percent – faster than expected, and well above the Federal Reserve’s target of 2 percent.
It was the latest sign that the economy needs a rise in interest rates when the Federal Reserve’s policymaking committee meets next month.
Before the new inflation number, most analysts had thought the next rise would come later in the year. Afterward, it looked like a closer call, with trades in derivatives suggesting a probability of roughly 40 percent that the mid-March meeting would raise rates.
That should make it easier for the Fed, which doesn’t like to surprise investors, to do the right thing.
The central bank has long said it will be patient about getting monetary policy back to normal, not wishing to stifle a recovery that’s been no better than tepid. But it has also said that its interest-rate decisions won’t be tied to a fixed schedule, but will depend on data as it arrives. The new figures tilt the balance in favor of further tightening, sooner rather than later.
A balance has to be struck. Moving too soon risks choking off some jobs that might otherwise be forthcoming. But waiting too long could leave the Fed no choice but to tighten policy abruptly amid fears of a surge in inflation – and that would be much worse for jobs.
There’ll be fresh data between now and the next Fed meeting, but as things stand, choosing not to nudge interest rates higher in March would be taking patience too far.
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