Fed Officials Split on Inflation's Path
24 June 2017 - 09:58AM
Dow Jones News
By David Harrison
Barely a week after raising short-term interest rates for the
second time this year, Federal Reserve officials are increasingly
divided on the timing of their next move, with some saying they
won't support another increase until they see a pickup in
inflation.
Inflation, as measured by the Fed's preferred gauge, breached
its annual 2% goal in February for the first time in nearly five
years but has since retreated, sinking to 1.7% in April.
Fed officials in their public remarks since their policy meeting
last week have disagreed on whether the recent weakening of price
pressures is likely transitory or perhaps more persistent.
Fed Chairwoman Janet Yellen, New York Fed President William
Dudley and Cleveland Fed chief Loretta Mester view the recent
sluggishness as probably temporary, driven by some one-time factors
such as new, more generous cellphone plans and slower growth in
prescription drug prices.
Others such as regional Fed bank presidents Charles Evans of
Chicago, Neel Kashkari of Minneapolis, Robert Kaplan of Dallas and
James Bullard of St. Louis have expressed more concern about slower
inflation.
Mr. Kaplan told reporters this week in San Francisco he would
like to see more evidence that weak inflation has passed before
raising short-term interest rates again. "I'd like to see now a
confirmation in the data that the recent weakness in March, and to
some extent April and May, was transitory," he said.
Mr. Evans said in an interview Tuesday he would prefer to hold
off on raising rates until the end of the year to make sure the Fed
wasn't falling further behind on its inflation goal. "I sometimes
wonder if there isn't something more global, more technological
that's taking place that we don't quite have our arms around very
well,"
Mr. Kashkari voted against the Fed's decisions to raise rates in
March and June, and last week cited low inflation as a reason.
The other camp is more confident that inflation will head
higher.
"Inflation is on this gradual upwards path that we've been
projecting for a while," Ms. Mester told reporters following a
speech in Cleveland on Friday. "We got a couple of weak reports but
fundamentally it doesn't look like demand is falling out."
Mr. Dudley also shrugged off the disappointing inflation numbers
in an appearance Monday. "If the labor market continues to tighten,
wages will gradually pick up, and with that we'll see inflation get
back to 2%," he said.
Ms. Yellen last week played down the recent numbers. "It's
important not to overreact to a few readings and data on inflation
can be noisy," she said June 14.
The divide could threaten the consensus that Ms. Yellen has
cultivated in her time at the helm. Fed officials last week
penciled in one more rate increase this year, but left open the
question of when that might occur. Mr. Evans and Mr. Kaplan, in
addition to Mr. Kashkari, hold votes on the Fed's policy-making
committee this year, raising the possibility of more dissents in
the coming months.
Mr. Bullard isn't a voter this year and doesn't support any more
rate increases in 2017. "The U.S. economy remains in a low-growth,
low-inflation, low-interest-rate regime," Mr. Bullard said Friday
in Nashville, Tenn. "The current level of the U.S. policy rate is
likely to be appropriate for this regime over the forecast
horizon."
The disagreements among officials reflect a conundrum that has
perplexed economists since the end of the recession. As the
unemployment rate has dropped, to 4.3% in May, economic theory
would predict higher wages and rising prices. But wage growth has
been relatively modest and inflation has undershot expectations,
leading some to question whether something has fundamentally
changed in the economy to hold down prices and interest rates.
Falling oil prices and bond yields could add another wrinkle to
the Fed's ongoing debate over monetary policy.
Oil prices dropped to their lowest level in more than 10 months
Wednesday, leading investors to expect continued sluggish inflation
in the months ahead. Yields on the 10-year Treasury note have sunk
to their lowest levels of the year in recent days, a sign that
investors don't see a pickup in prices and economic activity in the
near term.
Investors are roughly evenly split over the odds of another Fed
rate increase this year, according to data compiled by CME
Group.
Low oil prices will likely push inflation closer to 1% than to
2% over the next six months, according to Gregory Daco, head of
U.S. Economics at Oxford Economics. That will keep Treasury yields
down and force the Fed to postpone its next rate increase, he wrote
in a note to clients Friday.
Write to David Harrison at david.harrison@wsj.com
(END) Dow Jones Newswires
June 23, 2017 19:43 ET (23:43 GMT)
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