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Fed Officials Split On Inflation's Path -- WSJ

24 Jun 2017 6:32 am
By David Harrison 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the US print edition of The Wall Street Journal (June 24, 2017).

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 24, 2017 02:32 ET (06:32 GMT)

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