Weak inflation erodes conviction at Fed on rate hikes

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By not doing so, he said, the Fed invites "unnecessary" market anxiety around the Fed's July and September meetings.

Minneapolis Federal Reserve President Neel Kashkari said on Friday that he was not alone at the USA central bank in his view that the Fed should have waited to raise interest rates until it was sure the recent drop in inflation really is temporary.

Fed Chair Janet Yellen expressed confidence that recent weak inflation readings were transitory. Certainly, the core of the Fed have a glass half-full approach to inflation, but there is no doubt that if the future inflation reads don't turn around, like they expect, then the market is going to pile into U.S. treasuries and continue offering USD's, notably against emerging market currencies like the MXN and BRL.

A widely-tracked measure of the underlying inflation trend that excludes volatile food and energy prices declined to 1.7 percent last month, according to data released Wednesday by the Labor Department.

More worryingly, some also pointed to the relative flatness of US Treasury yield curves as a sign the markets may be expecting poor growth or even recession - which would only be exacerbated by central bank tightening. He also voted against the Fed's first rate hike this year, in March.

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"I'm not calling it a pause yet", he told reporters after speaking to the Park Cities Rotary Club.

In particular, Kashkari is concerned about recent slippage in inflation away from the Fed's elusive 2% target, which it has undershot for most of the economic recovery that began in the summer of 2009.

There is pressure on central banks to "normalise" their interest rates to avert the risk of future inflation catastrophes after years of QE and low rates.

"If we base our outlook for inflation on these actual data, we shouldn't have raised rates this week", Kashkari said in an essay published on the bank's website. "Today, that same faith may be leading the committee to repeatedly (and erroneously) forecast increasing inflation, resulting in us raising rates too quickly and continuing to undershoot our inflation target", he said.

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