Fed's Kashkari says voted against rate rise on inflation, yield curve worries

WASHINGTON (Reuters) - Minneapolis Federal Reserve Bank President Neel Kashkari said on Monday he voted against the Fed’s decision to raise interest rates last week over worries on weak inflation and a flattening of the yield curve.

FILE PHOTO - 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

Kaskhari has dissented from all three of the U.S. central bank’s decisions to raise interest rates this year and had previously cited inflation as his chief concern.

“Now a new concern is emerging: In response to our rate hikes, the yield curve has flattened significantly, potentially signaling an increasing risk of a recession,” Kashkari said in a statement.

Policymakers voted 7-2 last Wednesday to raise interest rates by a quarter of a percentage point to a range of 1.25 percent to 1.50 percent and pointed to the strength of the U.S. economy and low unemployment for continuing to tighten monetary policy despite tepid inflation.

Kashkari was joined in dissenting by Chicago Fed President Charles Evans, who also cited worries about inflation, which has run below the Fed’s 2 percent target rate for more than 5 years.

The Fed was entering a “delicate phase” in its tightening cycle, Kashkari said, and raising interest rates in such an environment could hold down wage growth and increase the risk of a contraction in economic activity.

Regarding the yield curve, he said the Fed’s decision to raise interest rates amid low inflation “is likely holding down the long end of the curve by depressing inflation expectations.”

Kashkari is the latest policymaker to fret over the yield curve. In recent weeks both Dallas Fed President Robert Kaplan and St. Louis Fed President James Bullard have said the flattening of the yield curve was a signal that the central bank should proceed slowly.

The shallow slope of the yield curve - the spread between 2- and 10-year notes is near the flattest in a decade - and whether it could invert, a signal of a possible economic recession, have triggered doubts in financial markets over the Fed’s rate rise plans.

At a press conference following the rate decision last week Fed Chair Janet Yellen downplayed concerns.

“I would say that the current slope is well within its historical range,” she said. “I think there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed.”

Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci