Fed's Kaplan Ties Next Hike to Inflation as Kashkari Chides FOMC

Paramount

Paramount

Their comments were the first public remarks by US central bankers following Fed Chair Janet Yellen's press conference on Wednesday to explain the Federal Open Market Committee's decision to raise rates for the second time this year.

"Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate", he argued. Fed Chair Janet Yellen said during a press conference to explain the FOMC decision to raise rates later in the day that "it's important not to overreact to a few readings, and data on inflation can be noisy".

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.

Kashkari worries some of his colleagues on the Federal Open Market Committee may be placing too much faith on an economics construct known as the Phillips Curve that predicts a tighter reverse relationship between the unemployment rate and inflation than has actually been seen in recent years.

A widely-tracked measure of the underlying inflation trend that excludes volatile food and energy prices declined to 1.7 percent last month, according to data released Wednesday by the Labor Department in Washington.

"In this job you make trade-off decisions; I think the fact that inflation 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. 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. It also maintained its forecast of one more rate hike this year and three the next.

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. Today, that same faith may be leading the Committee to repeatedly (and erroneously) forecast increasing inflation, resulting in us raising rates too quickly and continuing to undershoot our inflation target.

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