Minneapolis Federal Reserve Bank President Neel Kashkari on Monday waded more deeply into the debate about low inflation and named a surprising culprit: the Fed itself.
In an essay published on the bank's website, Kashkari said the Fed's moves to tighten monetary policy over the past few years "is likely an important factor driving inflation expectations lower."
He said those expectations, coupled with ongoing slack in the labor pool, are the most likely reasons that inflation has remained below the Fed's target rate of 2 percent for the past five years.
Typically, inflation tends to rise when the Fed tightens monetary policy, such as by lifting interest rates. But inflation has remained low during the four years since the Fed ended its last program of monetary easing, a bond-buying effort that created a portfolio it will soon begin to unwind.
Last week, Fed Chairwoman Janet Yellen tackled the low-inflation conundrum by raising the same causes and criticizing herself and other Fed policymakers. "My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective or even the fundamental forces driving inflation," Yellen said.
In his essay, Kashkari said he drew somewhat different policy conclusions than Yellen but praised her for raising the discussion.
Kashkari said he thinks the Fed's rate-setting Open Market Committee, of which he is a voting member this year, should hold off on further rate increases and focus on getting inflation back to the 2 percent target.
"My preference would be not to raise rates again until we actually hit 2 percent core PCE inflation on a 12-month basis, unless we have seen a large drop in the headline unemployment rate signaling that we have used up remaining labor market slack, or a surprise increase in inflation expectations," Kashkari wrote.
All year he has been dovish on raising interest rates, citing the persistence of low inflation and his perception that the country, despite low rates of unemployment, has not returned to full employment. He voted against both of the Fed's rate hikes this year, in March and June.