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Fed officials cautious about rate hikes amid inflation lag

Fed officials cautious about rate hikes amid inflation lag
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Two Federal Reserve officials sounded caution about increasing interest rates while inflation remains below the central bank’s target range.

Federal Reserve Governor Lael Brainard said Tuesday that she’s cautious about advocating for further interest rate hikes while the central bank weighs how to guide inflation back toward normal levels.

Brainard said she wants the Fed “to move cautiously on further increases” while the inflation lingers below the central bank’s target rate. She said that the federal funds rate, currently set between 1 and 1.25 percent, wasn’t far from the neutral level sought by Fed officials.

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“We would not have much more additional work to do on moving to a neutral stance,” said Brainard, who had been cautious about hiking rates before supporting the Fed’s past three increases.

Brainard’s concerns were echoed Tuesday by Philadelphia Fed President Patrick Harker, who told The Wall Street Journal that a continued lack of inflation increases “would give me a little pause in terms of the policy path.”

The Fed’s main gauge for inflation, the personal consumption expenditures price index, rose only 1.4 percent in May from the previous year. A 2.1 percent annual increase in February was the only month since 2012 the index’s annual increase exceeded the Fed’s target, according to the Journal.

The Fed has raised interest rates three times in the past seven months, after nearly a decade without increases before 2015. After rate hikes in December 2015 and December 2016, the Fed raised rates again in March as unemployment and inflation hovered around the bank’s target ranges. The bank is expected to hike rates at least once more this year.

Inflation has weakened in recent months, trailing below the Fed’s 2 percent target, and the bank is mulling how and if to respond as it attempts to normalize historically low interest rates. With unemployment stable and below the Fed’s 5 percent target but wages largely stagnant, the bank must determine how quickly it can raise rates.

Federal Reserve Chairwoman Janet Yellen will likely be pressed on those questions when she testifies before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday.

Observers will also seek answers from Yellen on how the Fed will release $4.5 trillion in bonds and debt purchased during the recession to stabilize financial markets. Brainard said Tuesday she’d support letting the Fed’s balance sheet begin to unwind in months if economic metrics stay strong.

“If the data continue to confirm a strong labor market and firming economic activity, I believe it would be appropriate soon to commence the gradual and predictable process of allowing the balance sheet to run off,” Brainard said.

The bank in June announced it would sell $6 billion per month of Treasury bonds it holds and $4 billion per month in agency debt and mortgage-backed securities.

The Fed will increase those caps by $6 billion every three months, until the bank is selling off $30 billion in Treasury bonds and $20 billion in debt each month.