REPEAT: Fed's Kashkari: Prefer No Hikes Until Core PCE Hits 2%

Repeats Story Initially Transmitted at 14:00 GMT Oct 2/10:00 EST Oct 2

--Low Inflation Likely Due To Labor Slack, Lower Infl Expectns

--Fed Policy Should Focus on Supporting Infl 

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Minneapolis President Neel

Kashkari said Monday he would prefer not to raise interest rates again until

inflation hits 2%, citing the Fed's own actions over the past few years as

having led to weaker inflation and falling inflation expectations. 

     "Our policy should focus on supporting inflation to ensure that we are on

track to return to our 2 percent target," he said in an essay posted online. 

     "My preference would be not to raise rates again until we actually hit 2

percent core PCE inflation on a 12-month basis, unless we have seen a large drop

in the headline unemployment rate signaling that we have used up remaining labor

market slack, or a surprise increase in inflation expectations."

     Kashkari has vetoed both of the Fed's interest rate increases this year,

saying he preferred to wait to hike until he saw evidence that the recent

decline in inflation was temporary. Most policymakers last month said the expect

to move rates another notch higher by the end of the year. Core PCE has slid

from 1.9% from late last year to 1.3% in August. 

     Kashkari said he believes the most likely causes of persistently low

inflation are "additional domestic labor market slack and falling inflation

expectations" and urged the Fed to "proceed with caution before we tighten

policy further." 

     Even as the Federal Open Market Committee has removed accommodation, it has

revised lower its estimates of the longer run neutral fed funds rate as well as

the natural rate of unemployment. "The Committee thought it was providing more

stimulus than it actually was" at the time, Kashkari said. 

     At the same time, inflation expectations as measured by market-based

securities and the Michigan survey of consumers began to fall in early 2014,

after the Fed began tapering its quantitative easing program, Kashkari said.  

     "Allowing inflation expectations to slip further will mean that we will

have less powerful tools to respond to a future economic downturn," Kashkari

said. "I believe these are significant costs that we must consider as we

contemplate the future path of policy." 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com