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etvfutures.com November 19, 2017


Weak inflation erodes conviction at Fed on rate hikes

18 June 2017, 02:04 | Cesar Cruz

Weak inflation erodes conviction at Fed on rate hikes

USD  JPY Daily Chart

To put some perceptive here, interest rate markets are pricing in one hike in 2018 and a 70% chance of another in 2019.

The statement that followed the FOMC meeting states that the members felt the USA economy continued to expand moderately, and they acknowledged the moderate job growth in the previous quarter. But while many of his colleagues were uncomfortable with risking a surge in inflation if the Fed failed to act, Kashkari was more anxious about the costs of excessively low inflation. The latest Fed staff forecast shows they expect inflation to still be below 2 percent in 2019.

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. But in his view, he said, waiting to raise rates further is the less costly option.

"We also anticipate a modest recovery in growth over the rest of the year, with or without Trump's stimulus package".

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Still, Kashkari, who ran the Treasury's bank bail out program during the 2008-2009 financial crisis, said the level of concern he feels now is "no comparison" to the feeling he had back then.

"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", he wrote.

Minneapolis Federal Reserve President Neel Kashkari said on Friday that he was not alone at the US central bank in his view that the Fed should have waited to raise interest rates until it was sure the recent drop in inflation really is temporary. But with inflation now falling to 1.5 percent by the Fed's preferred gauge, "even having that conversation right now makes no sense".

"I really hope and believe she should be reappointed because there's nobody I can think of that would do better", Kashkari said.



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