Fed's Mester argues for rate hikes as Bullard counsels patience

[WASHINGTON] Federal Reserve officials on Friday argued both sides of the debate over how the US central bank should react to a recent downturn in inflation, highlighting a discussion that could determine how many more times its raises interest rates this year and next.

Federal Reserve Bank of Cleveland President Loretta Mester told reporters that four months of softening inflation haven't changed her outlook for the economy or her preference for continued gradual rate hikes.

"The real question is, does the inflation data tell you something about demand. Is demand weakening in the sense that now prices are falling," Ms Mester said after a speech in Cleveland.

"That's not my assessment."

She is not a voter on the rate-setting Federal Open Market Committee this year.

Speaking in Nashville earlier, St Louis Fed chief James Bullard said the absence of inflation pressures gives the central bank scope for patience.

Recent weak readings on inflation, which has been under the Fed's 2 per cent target for almost every month since April 2012, have raised worries in some quarters that it's headed for a mistake if price pressures don't rebound and officials continue to tighten monetary policy. But Chair Janet Yellen, speaking on June 14 after the Fed raised rates for the second time this year, expressed confidence that a strong labour market would rejuvenate price pressures.

Fed officials expect to lift rates once more in 2017, according to their latest quarterly median projections. They also intend to begin trimming their US$4.5 trillion balance sheet this year; a move that, like a rate hike, is likely to raise real borrowing costs.

Mr Bullard who has argued for months that US growth is trapped in a 2 per cent rut, said he saw no reason to lift rates as recent price data raise doubts that inflation will rise to target.

"I don't think there is that much inflationary pressure in the US today, and I don't think that the labour market outcomes are contributing very much to inflationary pressure, Mr Bullard told reporters. He's also not an FOMC voter in 2017.

A widely tracked year-on-year measure of the underlying inflation trend that excludes food and energy prices slowed to 1.7 per cent last month, marking the fourth straight month of declines, according to data released by the US Labor Department.

That trend, at a time when US unemployment of 4.3 per cent is already at a 16-year low, is worrying Fed doves.

Earlier this week Chicago Fed President Charles Evans said the central bank needed to show its commitment to its 2 per cent target by waiting for more convincing data on inflation.

Fed Governor Lael Brainard, in a speech before the FOMC's June 14 hike, that she may cut her outlook for policy moves in the second half of 2017 if weak inflation persists.

Hawkish Tone

By contrast, Ms Mester on Friday put herself squarely in Ms Yellen's camp.

"We don't want to undermine credibility on the inflation target, but I think people react too much to one or two data reports," said Ms Mester, who is among the FOMC's more hawkish members and twice dissented against majority decisions to keep rates on hold when she was a voter in 2016.

New York Fed President William Dudley, who is also vice-chairman of the FOMC and has a permanent policy vote, has also lined up with Ms Yellen, saying on June 19 that a tightening labour market will drive inflation back to 2 per cent.

BLOOMBERG