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Weak inflation erodes conviction at Fed

Monday, June 19, 2017

WHEN the Federal Reserve raised rates earlier this week, Fed Chair Janet Yellen expressed confidence that recent weak inflation readings were transitory. Fed officials on Friday signaled that doubts are simmering.

In an interview with Reuters on Friday, Minneapolis Federal Reserve President Neel Kashkari said he was not alone at the US central bank in his view the Fed should have waited to raise interest rates 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," Mr Kashkari said in a phone interview with Reuters.

"I think that there's more sympathy for my views, but maybe people aren't ready to take action."

Mr 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 rate hike 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 inflation if the Fed failed to act, Mr Kashkari was more worried about the costs of excessively low inflation.

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

The US unemployment rate fell to a 16-year low of 4.3 per cent in May, but the Fed's preferred measure of underlying inflation has been running below target for more than five years and in April slowed a second month to 1.5 per cent. That has led to some beginning to question the validity of the traditional narrative of a tight labour market eventually sparking higher inflation.

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