November 29, 2017 / 10:00 PM / a year ago

Fed should be okay with 2.7 percent inflation for five years: Kashkari

PHOENIX (Reuters) - The Federal Reserve should be okay with allowing U.S. inflation to run at 2.7 percent for five years, Minneapolis Fed President Neel Kashkari said on Wednesday, embracing a view that is not widely shared at the U.S. central bank but reflects his generally dovish policy stance.

FILE PHOTO - Minneapolis Fed President Neel Kashkari speaks during an interview at Reuters in New York February 17, 2016. REUTERS/Brendan McDermid

“We’ve been 1.3% for 5+ years so we should be comfortable at 2.7% for 5+ years,” Kashkari said on Twitter in an hour long open question-and-answer session he dubbed #AskNeel. “That’s what we are saying when we call it a target and not a ceiling.”

The Fed since 2012 has targeted 2-percent inflation, and has emphasized it would tolerate temporary and modest increases above that level.

But the idea of keeping inflation so hot for so long runs counter to how Fed Chair Janet Yellen has described the U.S. central bank’s policy.

“We are not trying to engineer an overshoot of inflation, not to compensate for past undershoots,” she explained in a 2016 press conference, though she said some under- and over-shooting of the 2-percent goal are tolerable.

In testimony earlier Wednesday, Yellen said she believes inflation is likely to rise and the Fed should continue to raise rates slowly. Kashkari said Wednesday he would like to see inflation rise to 2 percent before raising rates.

“2% core PCE on a 12-month basis would be a good place to start,” he said in response to a question about what level of inflation he would like to see before tapping the brakes on the economy. The core personal consumption expenditures index, or PCE, is the Fed’s preferred gauge of inflation.

Kashkari has dissented at each Fed rate increase this year, and has signaled he may dissent again if the Fed raises rates at its next meeting in December.

On Twitter, Kashkari said he is concerned by the flattening of the yield curve, which some believe reflects concern that inflation will continue to undershoot the Fed’s 2-percent target.

“The more we commit to driving rates higher (regardless of data), the more we risk pressuring inflation expectations to the downside,” he said.

Reporting by Ann Saphir; Editing by Chizu Nomiyama and Diane Craft

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