December 19, 2017 / 6:42 PM / 5 months ago

Fed's Kashkari says should wait for inflation

(Reuters) - Minneapolis Federal Reserve Bank President Neel Kashkari, who this year has dissented three times in votes at the U.S. central bank’s policy meetings which raised rates despite low inflation, on Tuesday repeated his view that the labor market still shows signs of slack and could be improved.

Minneapolis Fed President Neel Kashkari speaks during an interview at Reuters in New York, U.S. on February 17, 2016. REUTERS/Brendan McDermid/File Photo

“Why should we raise rates until we actually see inflationary pressures building?” Kashkari asked at a Lambda Alpha International meeting in Roseville, Minnesota.

He added that by his estimate, a million workers are sidelined and could return to the workforce if the job market continues to strengthen. “We are better off letting inflation come to us than preemptively cutting off the expansion by raising rates prematurely.”

The Fed last week raised interest rates even though inflation has weakened despite an unemployment rate of 4.1 percent. The decision also drew dissent from Chicago Fed president Charles Evans.

Kashkari on Monday laid out in detail his reasons for dissent, which also stemmed from his worry that the flattening yield curve suggests the bond market is betting on low growth and low inflation ahead, despite a tax plan that Republican members of Congress and the administration say will boost growth.

“We should take that seriously,” Kashkari said on Tuesday.

A provision in the tax plan that would encourage companies to repatriate cash from overseas, he said, would likely spur stock buybacks rather than investment in new factories, as some Republicans have suggested is the aim.

Still, he said, long-term bond yields do suggest investors are not worried about financing the tax cuts, estimated to add $1.5 trillion to the federal debt over 10 years. Over the long term, a rising federal debt is a big threat to economic growth, Kashakari said.

“It’s a political question” on how to resolve that threat, he said.

Reporting by Ann SaphirEditing by Chizu Nomiyama

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