Fed official warns of risk from a sudden interest rate hike

One of three Federal Reserve officials who dissented in its most recent policy decision has issued a warning that the US central bank is taking on a huge amount of risk by not properly observing and paying attention to the economic pressures of low inflation and what effect it could have on the US economy in the long-term.

The president of the Fed’s regional bank in Minneapolis, Narayana Kocherlakota, said on Friday that the Fed has failed to respond to weak inflation and that the country is running the same risks as Japan and Europe in creating a harmful downward slide in inflation.

At the same time the Philadelphia Fed president, Charles Plosser, is also unhappy with the Fed’s recent policy position. He has expressed that it’s a mistake to say that the central bank will be patient when deciding when to raise interest rates as well saying that the policy has not changed from its last meeting in October – when the central bank stated that it would keep rates low for a considerable time.

“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 provided reasons on why they voted against the Fed’s decision, however the Dallas Fed president Richard Fisher did not issue a statement explaining why he voted against.

Plosser and Fisher are considered to be the most hawkish individuals at the Fed, they believe that the central bank should focus more on the dangers of low interest rates that could cause higher inflation down the road.

Kocherlakot believes that the labor market has recovered since the great recession, however there’re still a long way to go in terms of wage growth and that prices are rising too slowly – not too quickly.

He said that he would’ve rather seen a plan to keep short-term interest rates the same as long as the outlook for inflation is below the Fed’s 2 percent target.

It has been six years now that the Fed has kept its target rate at a record low, near zero, and the economy appears to be improving, which should pressure the central bank to raise rates in the near future.

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