By Michael S. Derby 

Two Federal Reserve officials said they believed the central bank should have lowered and not held steady its short-term rate target this week to help address persistently weak inflation pressures and rising economic risks.

The preference for a rate cut by Federal Reserve Bank of St. Louis leader James Bullard was known because he was the single central bank official to cast a dissenting vote Wednesday when his colleagues decided to maintain their short-term target-rate range at between 2.25% and 2.5%.

Another official would have dissented had he had a vote, but he didn't due to the annual rotation of regional bank presidents on the rate-setting Federal Open Market Committee. In an essay released Friday, Minneapolis Fed leader Neel Kashkari said that aggressive action was called for. "I advocated for a 50-basis-point rate cut to 1.75% to 2% and a commitment not to raise rates again until core inflation reaches our 2% target on a sustained basis," he wrote.

Fed officials have "consistently been too optimistic in forecasting inflation returning to 2%," Mr. Kashkari said. If the Fed would now make a "strong, credible commitment" to get inflation up it would likely work. But, "if economic conditions weaken or if inflation fails to return to target, this strategy does not preclude further rate reductions."

Mr. Bullard, in a separate essay, offered his own rationale for why he believed the Fed should have lowered its target-rate range by a quarter percentage point.

"Lowering the target range for the federal funds rate at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks," Mr. Bullard said in the text of a note that explained why he cast a dissenting vote against the FOMC's decision.

"Even if a sharper-than-expected slowdown does not materialize, a rate cut would help promote a more rapid return of inflation and inflation expectations to target," said Mr. Bullard, adding that it is unlikely low inflation is temporary.

Mr. Bullard's dissent wasn't unexpected. It was the first by any member during Chairman Jerome Powell's tenure and the first since the Fed's December 2017 policy meeting. Mr. Bullard had hinted strongly ahead of the meeting that he wanted monetary policy moved to an easier setting.

Since this year began, the veteran central banker has shared a strong level of concern about the outlook in light of what is happening in financial markets, where bond yields have signaled the possibility of a recession at some point. Mr. Bullard has also worried about the Fed's failure to achieve its 2% inflation target, something it hasn't sustainably done since adopting that goal in 2012.

In a speech June 3, Mr. Bullard indicated he was ready to lower rates and said an easing could help boost inflation and "provide some insurance" in case the U.S.'s trade battles with other countries cause too much distress to the economy.

Inflation has indeed been weak. Compared with its target, the Fed's preferred price gauge, the personal-consumption expenditures price index, rose 1.5% in April from the same month a year ago. Stripped of food and energy costs, it was up 1.6%.

All manner of inflation expectations data have also softened, based on market measures and surveys of the public. The expected path of inflation is a strong influence on where inflation stands now, Fed officials believe, so the decline in expectations is worrisome when price pressures are already low.

Mr. Kashkari has, like Mr. Bullard, expressed skepticism in the past over Fed rate rises. But his new position was a bit of a surprise, as he had said in comments ahead of the FOMC meeting that he wasn't yet ready to call for lower rates.

The dovish outlook of Messrs. Kashkari and Bullard is spreading among central bankers. At this week's gathering, out of 17 FOMC members, eight projected lower rates this year, with seven of those expecting the Fed's benchmark rate to be a half percentage point lower by year's end.

Mr. Powell said in his news conference Wednesday "though some participants wrote down policy cuts and others didn't, our deliberations made clear that a number of those who wrote down a flat rate path agree that the case for additional accommodation has strengthened since our May meeting."

In his note, Mr. Kashkari said if lower rates spark too much inflation the central bank can easily raise rates to deal with the problem. He also sees minimal financial-stability risks from pushing short-term borrowing costs down.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

June 21, 2019 12:00 ET (16:00 GMT)

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