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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:

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