Fed officials set battle lines on rate hikes ahead of March meet

Mon Mar 7, 2016 7:04pm EST
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By Howard Schneider, Jason Lange and Lindsay Dunsmuir

WASHINGTON (Reuters) - After a long wait for inflation to accelerate, U.S. Federal Reserve officials face a complex and possibly divisive debate over whether recent evidence of rising prices is strong enough to move ahead with planned rate hikes.

In separate statements on Monday, policymakers at the core of that debate staked out starkly different views, with Fed Vice Chairman Stanley Fischer saying economic data now points to the "first stirrings" of inflation, and Fed Governor Lael Brainard countering that the Fed should not move until inflation proves its "persistence."

The differing views may not matter immediately, when the Fed meets next week. A rate hike at that meeting is not expected after weeks in which oil prices have remained depressed and global equity markets have been volatile.

But it could tax Fed Chair Janet Yellen's ability to maintain consensus over the year as the Fed decides whether it is riskier to let inflation rise more quickly now, and try to control it later, or raise rates more slowly in a weak world economic environment. That discussion, largely moot over an extended period in which the Fed persistently missed its 2 percent inflation target, may be joined in full after the central bank's preferred measure of inflation rose to 1.7 percent in January.

"We're not that far away" from an inflation target that has been elusive in an era of cheap oil, weak global demand and a strong U.S. dollar that has held down the cost of imports, Fischer said.

Fed officials have argued since mid-2014 that those inflation "headwinds" would pass, and recent data on prices of goods and services, as well as a jump in commodity prices, may indicate that time has finally come.

"We may well at present be seeing the first stirrings of an increase in the inflation rate," Fischer said, adding that an increase from too-low levels is "something that we would like to happen."

Investors who had largely priced out a further Fed rate hike until late this year have pushed those expectations forward in recent days, as oil has rallied and prices of some other commodities crept higher.   Continued...

The Federal Reserve Building is reflected on a car in Washington September 16, 2008.    REUTERS/Jim Young