One of three US Federal Reserve officials who dissented in the Fed’s policy decision this week is warning that the central bank is taking an “unacceptable” risk by not paying more attention to the dangers posed by low inflation.
Minneapolis Fed President Narayana Kocherlakota on Friday said that the Fed’s failure to respond to weak inflation “runs the risk of creating a harmful downward slide in inflation” similar to the problems facing Japan and Europe.
Meanwhile, Philadelphia Fed President Charles Plosser, another dissenter at the US Federal Open Market Committee meeting, is unhappy for a different reason. He feels the Fed is making a mistake by saying it would still be patient in deciding when to begin raising interest rates.
Plosser said it was an error to use the word “patient” and also to say that current policy had not changed from the October meeting when the Fed was saying that rates would remain near a record low for “a considerable period.”
“Whether saying we will be patient or we will wait a considerable time, the language continues to stress the passage of time as a key determinant of policy,” Plosser said. “Such date-based guidance is problematic since policy should be determined by the data.”
Both Plosser and Kocherlakota issued statements explaining their votes on the Fed’s decision, which was approved seven-to-three. Dallas Fed President Richard Fisher did not issue a statement elaborating on his “no” vote.
The three dissents were the most since 2011 and underscored the sharp divisions inside the Fed as it transitions from an extended period of ultra-low rates to a period in which it is set to start raising rates.
Both Plosser and Fisher are leading hawks, Fed officials who believe the central bank should be focused more on the danger that a prolonged period of low-interest rates could trigger higher inflation in the future.
Kocherlakota is one of the most vocal doves, the group of Fed officials who believe that even though the labor market has begun to recover from 2007 to 2009 financial crisis, wage growth is still weak and the danger is that prices are rising too slowly, not that they are rising too quickly.
The Fed has kept its target interest rate at near zero for six years. Many economists believe with the economy improving, the Fed is moving closer to raising rates, but will not do so until June next year.
Richmond Fed President Jeffrey Lacker, an ardent critic of the central bank’s loose monetary policy, on Friday said that he backs the statement that the Fed would be patient on raising interest rates.
“I support the characterization that we can be patient at this point,” he told reporters after taking part in a panel discussion in Charlotte, North Carolina. “That characterization could change from meeting to meeting for me.”
Lacker dissented at every committee meeting in 2012 in favor of a less accommodative policy stance.
“At this meeting, I didn’t think we were there yet. I would like to see a little more data first” before increasing rates, he told reporters.
“I think it is highly likely rates will go up next year, not a certainty but a likelihood,” Lacker told the panel.
Additional reporting by Bloomberg
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