Yellen steers Fed with cautious hand, despite hints of inflation

Thu Mar 17, 2016 1:41pm EDT
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By Jason Lange, Jonathan Spicer and Ann Saphir

WASHINGTON (Reuters) - Federal Reserve policymakers urging caution over interest rate hikes have gained the upper hand in the central bank's internal debate, but the risk for the U.S. economy is that they are wrong to downplay a recent rise in inflation.

In words that echo those of colleagues on the Fed's dovish wing, Fed Chair Janet Yellen told a news conference on Wednesday that "caution is appropriate" when it comes to raising interest rates. She said she was not convinced underlying inflation had accelerated.

If Yellen is right, financial markets have ample warning for the gradual pace of rate hikes she said was likely.

But many private economists buy into the argument by an opposing faction within the Fed that U.S. inflation is indeed stirring.

They point to a range of recent data to back their view, including a reading this week showing underlying U.S. inflation rose 2.3 percent in the 12 months through February, the biggest increase in more than three years. The Fed's target is 2-percent inflation.

Data released Thursday added to a picture of economic growth that could support further inflation, including the first expansion of factory activity in the mid-Atlantic region in seven months, job openings hitting a six-month high and a rise in a gauge of future economic activity.

Faster price gains would likely trigger more aggressive rate hikes which Yellen in the past has warned could cause a recession.

"If we got to a point where the Fed had to raise (rates) quickly, it could be very destabilizing," said Northern Trust economist Carl Tannenbaum, formerly an economist at the Chicago Fed.   Continued...

U.S. Federal Reserve Chair Janet Yellen holds a press conference following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington March 16, 2016.REUTERS/Kevin Lamarque