Fed's Kaplan Ties Next Hike to Inflation as Kashkari Chides FOMC

JPY USD  JPY stable around 110.50

The British pound recovered from a three-day selloff, rising 0.5% against the dollar, after data showed United Kingdom inflation spiked in May.

"We should have waited to see if the recent drop in inflation is transitory to ensure that we are fulling our inflation mandate" to get inflation back to 2%, Kashkari said.

Inflationary pressures are one of the prime motivators behind a central bank raising rates, and so this week's CPI reading is an important indicator which the Fed. looks at when determining its rate policy.

On Wednesday, Yellen and her majority signaled they plan to continue to plans to raise interest rates one more time this year and three times in 2018.

Kaplan, who spoke later on Friday in Dallas, said he was open to arguments that weak inflation readings were transitory, but the consecutive monthly declines had attracted his attention.

"In this job you make trade-off decisions; I think the fact that inflation of late has been more muted, for me, made me weigh those trade-offs much more carefully", Kaplan told reporters after a meeting of the Park Cities Rotary Club in Dallas. But while many of his colleagues were uncomfortable with risking a surge in inflation if the Fed failed to act, Kashkari was more anxious about the costs of excessively low inflation. But we have seen strong selling in the fed funds future January 2019 and 2020 contract, so traders pricing out the prospect of tightening through the next couple of years.

Kaplan said the Phillips curve had flattened, while Kashkari criticized his colleagues for relying so much on an economic model that had been around for nearly 60 years.

"If we are making a mistake, we are making a small mistake now that I think we can recover from", Kashkari said in the interview.

The Fed announcement itself and economic and rate projections seemed to be closely aligned to market expectations.

"Expect see the "T" word get plenty of airtime this week, and the Fed will point to some recent better news - most notably the dramatic fall in the unemployment rate since January".

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