US Fed official raises doubt about weakening inflation

The Fed on Wednesday raised the benchmark interest rates for the fourth time since December 2015 and unveiled a plan to trim its balance sheet later this year, sending a signal of confidence to the market.

Kashkari, the lone dissenter who also voted against a rate hike in March, said the risk of raising rates too soon is a continuation of the central bank's "track record of coming up short of our inflation objective".

"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.

One of the highest-ranking U.S. central bank officials argued for caution when deciding on the pace of interest rate hikes. In the Reuters interview he said he believes his colleagues may be increasingly uncomfortable with low interest rates because they fear making the same mistake the Fed did in the 1970s, when it failed head off what became runaway inflation.

"The run of weaker core inflation readings has clearly rattled some Fed officials", Capital Economics wrote in a note to clients earlier on Friday. Kashkari voted against the Fed's decision Wednesday to raise rates by a quarter of a percent.

"Recent global developments add doubt to whether the traditional dynamics still work", Barclays economist Christian Keller said on Friday. Prices of Treasury bonds suggest that investors expect the Fed's preferred measure of inflation to remain well under 2 percent five to 10 years from now.

He spoke at the end of May and noted soft inflation then but said it wasn't enough to alter his forecast, which is for three hikes this year.

But policymakers' inflation forecasts are more optimistic than forecasts by Fed staff, who provide economic intel to the Fed Board of Governors. "My predecessor and I could not be more different", said Kashkari, who has been an aerospace engineer, a Republican candidate for California governor, and the head of the USA government's bank bailout program in the financial crisis.

  • Zachary Reyes