You are here: Home » Reuters » News
Business Standard

Weak inflation erodes conviction at Fed on rate hikes


By Ann Saphir and Lindsay Dunsmuir

DALLAS/(Reuters) - When the Federal Reserve raised rates earlier this week, Chair Janet Yellen expressed confidence that recent weak readings were transitory. officials on Friday signalled that doubts are simmering.

In an interview with on Friday, Minneapolis Federal Reserve President Neel Kashkari said he was not alone at the U.S. central bank in his view the should have waited to raise until it was sure the recent drop in price pressures really is temporary.

"I wish other people were joining me in my dissents, I'll say that," Kashkari said in a phone interview with "I think that there's more sympathy for my views, but maybe people aren't ready to take action."

Kashkari was the lone policymaker to vote against the Fed's decision on Wednesday to raise its benchmark lending rate by a quarter percentage point.

He also voted against the Fed's first this year, in March, although he said that his June decision was a closer call because the labour market had clearly strengthened. But while many of his colleagues were uncomfortable with risking a surge in if the failed to act, Kashkari was more worried about the costs of excessively low

Dallas Federal Reserve President Robert Kaplan on Friday also signalled the decision to raise rates earlier this week was a tough one, although he in the end supported a and said he feels comfortable with that decision.

"In this job you make trade-off decisions; I think the fact that of late has been more muted, for me, made me weigh those trade-offs much more carefully," Kaplan told reporters after a meeting of the Park Cities Rotary Club in Dallas. But he said he would want to see more evidence that will rise towards the Fed's 2-percent goal before increasing rates again.

"The run of weaker core readings has clearly rattled some officials," Capital Economics wrote in a note to clients earlier on Friday.

The U.S. unemployment rate fell to a 16-year low of 4.3 percent in May, but the Fed's preferred measure of underlying has been running below target for more than five years and in April slowed a second month to 1.5 percent.

That has led to some beginning to question the validity of the traditional narrative of a tight labour market eventually sparking higher

"Recent global developments add doubt to whether the traditional dynamics still work," Barclays economist Christian Keller said on Friday. He cited the examples of Japan and Germany, whose unemployment levels have declined to levels not seen since the early 1990s but where wage pressures also remain sluggish.

At its latest meeting, the scaled back its forecasts for this year to 1.6 percent but according to policymakers' median forecasts, still sees rising to 2 percent next year. It also maintained its forecast of one more this year and three the next.

But policymakers' forecasts are more optimistic than forecasts by staff, who provide economic intel to the Board of Governors. The latest staff forecast shows they expect to still be below 2 percent in 2019.

Still, Kashkari, who ran the Treasury's bank bailout programme during the 2007-2009 financial crisis, said the level of concern he feels now is "no comparison" to the feeling he had back then.

"If we are making a mistake, we are making a small mistake now that I think we can recover from," Kashkari said in the interview. "I am not sounding an alarm bell like, 'Iceberg ahead!'"

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)