Fed's rate hikes causing low inflation, Kashkari says

REUTERS - The Federal Reserve's own actions, not transitory factors, are responsible for weak inflation, a Fed policymaker argued on Monday, and the U.S. central bank should wait to raise rates again until inflation hits its 2-percent goal.

"The FOMC's policy to remove monetary accommodation over the past few years is likely an important factor driving inflation expectations lower," Minneapolis Fed President Neel Kashkari wrote in an essay on the bank's website, referring to the central bank's Federal Open Market Committee, which sets U.S. interest rates. "My preference would be not to raise rates again until we actually hit 2 percent core PCE inflation on a 12-month basis, unless we have seen a large drop in the headline unemployment rate signaling that we have used up remaining labor market slack, or a surprise increase in inflation expectations."

Kashkari's comments stake out a dovish view of policy at odds with that of the Fed's core, who expect inflation to strengthen as the labor market market tightens. Most Fed policymakers, including Fed Chair Janet Yellen, expect they will need to raise rates in December, and three more times next year, to keep the economy from overheating.

Kashkari, who dissented twice this year against Fed rate hikes, argued Monday that the Fed's decision to end bond-buying in 2014, its hawkish guidance on rate hikes since then, and the four rate hikes it has actually completed have pushed inflation expectations down and kept job and wage growth slower than they would have been otherwise.

Allowing inflation expectations to slip gives the Fed less leeway to fight future downturns with rate cuts, he said.

"There is no reason to raise rates until we start to see wages and inflation climb back to target," Kashkari wrote. "The only explanation that would potentially call for further policy tightening is the transitory factor explanation. But the longer low inflation persists (here and around the world), the more tenuous that story becomes."

The Fed should therefore "proceed with caution" on raising rates further, he said.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)