Kaplan and Kashkari: Slowing Inflation Makes More Rate Hikes a Challenge
Just two days ago the FOMC decided once again to raise the target range for the Fed Funds rate, with Yellen expressing optimism about 2% inflation and therefore (in the Keynesian framework), the economy itself. While Dallas Fed President Robert Kaplan voted with everyone else (except Neel Kashkari) to hike rates, he today made it clear that the inflation trend is worrying him. If the inflation rate continues to move away from 2%, his opinion is that rate hikes should be suspended.
The June decision was therefore tougher for him to make. Reuters reports:
"In this job you make trade-off decisions; I think the fact that inflation of late has been more muted, for me, made me weigh those trade-offs much more carefully," Kaplan told reporters after a meeting of the Park Cities Rotary Club in Dallas. While he is comfortable with where rates are now, he said, "before I’d be comfortable taking the next step in raising the fed funds rate, I’m going to want to see more evidence that we are making more progress" toward the Fed's 2-percent inflation goal.
His concern about inflation is also the very reason that Neel Kashkari dissented on the rate decision. On his own blog, Kashkari referred to the alleged tradeoff between inflation and unemployment (known as the Phillips Curve) and noted that he believes the slowing inflation is sending a warning to the labor market. That is, since inflation was slowing, the employment numbers may soon reveal a scenario that is less rosy than their current trend. He writes:
On the other hand, unfortunately, the data aren’t supporting this story [that falling unemployment numbers are congruent with rising inflation--CJE], with the FOMC coming up short on its inflation target for many years in a row, and now with core inflation actually falling even as the labor market is tightening. If we base our outlook for inflation on these actual data, we shouldn’t have raised rates this week. Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate.
Both Kashkari and Kaplan are worried that inflation trends are slowing and therefore don't want any rate hikes to impede the glorious path toward 2%. Of course, Kashkari is already talking about inflation beyond 2%, stating that an "overshoot of 2 percent... shouldn’t be concerning since we say we have a symmetric target and not a ceiling." When it comes down to it, don't think that a 2% devaluation of our purchasing power will stop the Fed's reckless ways.