Federal Reserve Bank of Minneapolis President Neel Kashkari said he dissented against the central bank’s decision to raise interest rates this week because of recent softening in inflation data.
“If we base our outlook for inflation on these actual data, we shouldn’t have raised rates this week,” Kashkari, who votes this year on the policy-setting Federal Open Market Committee, said Friday in an essay published on the Minneapolis Fed’s website.
“Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate,” said Kashkari, who also dissented against a FOMC decision in March to raise rates.
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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. The report marked a third straight month of surprise declines. 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.”
Yellen also cited a low unemployment rate as justification for the rate increase, referring to a relationship between the labor market and price pressures known as the Phillips curve, which she said “remains at work.”
In his essay, Kashkari criticized his colleagues for employing that line of reasoning.
“The outcome that the current FOMC is so focused on avoiding, high inflation of the 1970s, may actually be leading us to repeat some of the same mistakes the FOMC made in the 1970s: a faith-based belief in the Phillips curve and an underappreciation of the role of expectations,” Kashkari said.
“In the 1970s, that faith led the Fed to keep rates too low, leading to very high inflation. 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,” he said.