Fed vice chair says bank should hike rates despite lagging inflation

Randal Quarles, the Federal Reserve’s vice chairman of supervision, said Thursday that the central bank should move ahead with projected interest rate hike even if inflation lags below target levels.

Quarles, the first Fed governor appointed by President Trump, said the bank shouldn’t let what he considers temporary factors suppressing inflation to affect monetary policy.

“The current shortfall in inflation from target [is] most likely due to transitory factors that will fade through 2018, pushing inflation back up to target,” Quarles said Thursday in Tokyo. “Suffice to say, a deviation from our target of a few tenths of 1 percentage point, especially one I expect to fade, does not cause me great concern.”

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The Fed considers a 2-percent annual increase in the personal consumption price index to be the ideal level of inflation to maintain steadily growing economy. Inflation has lingered below that level, though the Bureau of Labor Statistics Consumer Price Index showed a 2.1 percent increase over the past 12 months.

Unemployment and wage growth has been better than what analysts initially projected for 2018. The uptick in economic activity has raised concerns on Wall Street that the Fed would hike rates more than three times, which is what the bank has forecasted for 2018.

The Fed is aiming to bring interest rates, currently set at a 1.25 percent to 1.5 percent range, back up to the historic neutral level. Rising interest rates would increase the cost of borrowing, which investors worry could tamper the torrid stock market that marked Trump’s first year in office.

U.S. stocks tanked for two weeks to end January and usher in February with the Dow Jones industrial average and S&P 500 losing 10 and 12 percent of their value each. The Nasdaq lost just under 10 percent in that time, just short of a formal correction.

Minutes from the Fed’s Jan. 30-31 meeting released Wednesday showed that the bank expects the economy to grow well enough to support its forecast of three rate hikes in 2018. Fed officials cited the unexpected size of increases in key metrics and economic stimulation from the GOP tax-cut bill.

The Fed held off on a rate hike last month, but is expected to raise rates in March.

Quarles said Thursday that “further gradual increases in the policy rate will be appropriate to both sustain a healthy labor market and stabilize inflation around our 2 percent objective.”

“Against this economic backdrop, with a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized,” Quarles said, adding that his views would change if the economy shifted.

Quarles said rising consumer confidence and business optimism could boost capital investment and labor productivity, both of which have weighed down GDP growth.

“It might be early, but it is possible that the investment drought that has afflicted the U.S. economy for the past five years may finally be breaking,” Quarles said.