Powell speaks during a news conference in Washington.
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Federal Reserve Chairman Jerome Powell is pinning his hopes of stopping the U.S. economy from overheating on a variable that a former colleague once called "the most significant unobservable of all:" inflation expectations. In recent public appearances, Powell has argued that the Fed can countenance a fall in joblessness to an almost 50-year low without triggering an inflationary surge in large part because Americans believe the central bank will keep prices under wraps. That makes Powell's focus on price expectations a risky move as the Fed gradually raises interest rates.Yields could march higher still if rising wages and surging oil prices trigger a spike in consumer prices, forcing the Powell Fed to rethink its gradual strategy for containing inflation.Government data Thursday are expected to show that consumer price inflation eased to 2.4 percent last month from 2.7 percent in August, according to the median forecast of economists surveyed by Bloomberg.Inside and outside the Fed, economists have sought to explain the seeming disconnect between consumer price changes and the job market by stressing the importance of inflation expectations.It is paradoxical that Powell is making policy contingent on a squishy concept like inflation expectations.
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