Fed's George, Kaplan stake out inflation debate at Jackson Hole

[JACKSON HOLE] Two Federal Reserve officials took opposite sides of the central bank's ongoing debate over how to respond to disappointingly low inflation figures, as policy makers gathered for their annual symposium in Jackson Hole, Wyoming.

Conference highlights this year include a speech by Fed Chair Janet Yellen at 10am New York-time on Friday, followed by a 3pm address by European Central Bank President Mario Draghi.

The gathering occurs against a backdrop of modestly improving global growth and lower unemployment, while inflation has failed to rise as expected.

Kansas City Fed President Esther George, who hosts the prestigious event, said in an interview with Bloomberg Television broadcast Thursday that if US economic data hold up, there will probably be an opportunity to raise interest rates again in 2017.

In a later interview with CNBC, Dallas Fed chief Robert Kaplan said officials should be more patient and wait for signs of renewed inflation before hiking rates again this year.

That said, they both favoured making an announcement in September on starting the gradual process of shrinking the Fed's US$4.5 trillion balance sheet.

The inflation question has divided policy makers in recent months, raising doubts among investors over whether the Fed will follow through on its projection to raise rates once more this year after hiking in March and June.

"I'll be looking at the data in the next few weeks as we get ready for the September meeting, and see whether that still makes sense," Ms George said, referring to another interest-rate increase this year.

"Based on what I see today, I think there's still opportunity to do that."

The rate-setting Federal Open Market Committee meets Sept 19-20.

Mr Kaplan argued that the committee should take its time to gather more data on inflation before deciding to hike again.

"I'm not saying we won't act by the end of the year, but we have the ability to be patient," he said.

Mr Kaplan is a voter this year on the FOMC, while Ms George next votes in 2019.

The US central bank is weighing when to start unwinding its balance-sheet holdings, with investors expecting an announcement at its meeting next month after officials indicated that a decision could be looming.

Officials are also monitoring inflation developments closely after a spate of weak readings softened price pressures further below its 2 per cent target. Its preferred gauge of price pressures rose 1.4 per cent in the 12 months through June and has been under the Fed's goal for most of the last five years.

Investors see a roughly one-in-three chance of another move by the end of the year, according to interest-rate futures pricing.

Mr Kaplan also said that the Fed may not need to raise rates as high in this tightening cycle to reach the so-called neutral rate - a theoretical level where the Fed's benchmark overnight rate is neither boosting nor suppressing growth.

"If you ask me today, I would say it's closer to 2 than to 3" per cent , he said, adding that if he'd answered that question 10 years ago, he would have said the range was 4 to 5 per cent. The Fed's policy rate target range is currently one per cent to 1.25 per cent.

"It means we're still accommodative, but we're probably not as accommodative as people think," he said.

The median estimate among Fed policy makers for the long-term federal funds rate was 3 per cent in their June quarterly forecasts, which will be updated next month. Of the eight officials who put their estimate at exactly 3 per cent, it would require only two to move the median lower by cutting their estimates in September.

BLOOMBERG