Weak inflation erodes conviction at Fed on rate hikes

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"We should be very careful about raising rates and we should do it patiently and carefully", Kaplan said at a meeting of the Park Cities Rotary Club in Dallas, adding that he will need to see improvements in inflation, which has weakened in recent months.

In an interview with Reuters on Friday, Minneapolis Federal Reserve President Neel Kashkari said he was not alone at the United States 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. Janet Yellen's decision reflects growing confidence in the United States economy and its strengthening job market. Fed officials on Friday signaled that doubts are simmering. This is the fourth rate hike since December 2015, when the U.S. began to normalise its rates following years of near-zero interest. Even so, the FOMC acknowledged that inflation had been running somewhat below its target and said it was monitoring developments "closely".

Given some of the disappointing data (particularly the most recent job report) it is perhaps not surprising that economists are seeing headline CPI falling from 2.2% back to 2.0% this month.

"We also anticipate a modest recovery in growth over the rest of the year, with or without Trump's stimulus package". But while many of his colleagues were uncomfortable with risking a surge in inflation if the Fed failed to act, Kashkari was more anxious about the costs of excessively low inflation.

However, Fed Chair Janet Yellen said Wednesday at a press conference that "it's important not to overreact to a few readings, and data on inflation can be noisy".

There is pressure on central banks to "normalise" their interest rates to avert the risk of future inflation catastrophes after years of QE and low rates. 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.

Kaplan said the Phillips curve had flattened, while Kashkari criticized his colleagues for relying so much on an economic model that had been around for nearly 60 years.


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