Fed officials debate pending rate hikes

WASHINGTON• Federal Reserve officials on Friday argued both side soft he debate over how the U.S. central bank should react to a recent downturn in inflation, highlighting a discussion that could determine how many more times it raises interest rates this year and next.

Federal Reserve Bank of Cleveland president Loretta Mester told reporters that four months of softening inflation haven’t changed her outlook for the economy or her preference for continued gradual rate hikes.

“The real question is, does the inflation data tell you something about demand? Is demand weakening in the sense that now prices are falling?” Mester said. “That’s not my assessment.” She is not a voter on the rate- setting Federal Open Market Committee this year.

Speaking in Nashville earlier, St. Louis Fed chief James Bullard said the absence of inflation pressures gives the central bank scope for patience.

Recent weak readings on inflation, which has been under the Fed’s two per cent target for almost every month since April 2012, have raised worries in some quarters that it’s headed for a mistake if price pressures don’t rebound and officials continue to tighten monetary policy. But chair Janet Yellen, speaking on June 14 after the Fed raised rates for the second time this year, expressed confidence that a strong labour market would rejuvenate price pressures.

Fed officials expect to lift rates once more in 2017, according to their latest quarterly median projections. They also intend to begin trimming their $ 4.5- trillion balance sheet this year; a move that, like a rate hike, is likely to raise real borrowing costs.

A widely tracked year-onyear measure of the underlying inflation trend that excludes food and energy prices slowed to 1.7 per cent last month, marking the fourth straight month of declines, according to data released by the U.S. Labor Department.

That trend, at a time when U.S. unemployment of 4.3 per cent is already at a 16- year low, is worrying Fed doves.

Earlier this week Chicago Fed president Charles Evans said the central bank needed to show its commitment to its 2 per cent target by waiting for more convincing data on inflation.

Fe d governor Lael Brainard, in a speech before the FOMC’s June 14 hike, said that she may cut her outlook for policy moves in the second half of 2017 if weak inflation persists.

QUESTION IS, DOES THE INFLATION DATA TELL YOU SOMETHING ABOUT DEMAND?