Recent data on U.S. inflation has not shown price pressures abating, and the Federal Reserve needs to stay vigilant, Philadelphia Federal Reserve Bank President Charles Plosser said on Friday.
"The last couple of months' numbers are not encouraging," he told reporters on the sidelines of a bankers' conference.
"We had seen some abatement of inflation but don't see that recently." He said, however, that one had to be careful in reading too much into one month's figures.
Still, "we need to wait and see and be vigilant" on inflation, Plosser said.
Plosser is not a voting member of the Fed's interest rate-setting committee this year. He is known as one of the more hawkish members among Fed policy-makers, and said last month that it was too early to declare victory over inflation.
Data last week showed the core consumer price index, which excludes volatile food and energy costs, rose 2.7 percent in February on a year-on-year basis, the same gain as in January.
The Fed's favored measure of inflation, the price index on core personal consumption expenditures, was up 2.3 percent compared with a year earlier. Some Fed officials have said they would like to see core PCE index below 2 percent.
Flatter Yield Curve
Earlier, Plosser told the conference that the spread between yields on short- and long-dated government securities may remain narrow in the future due to stable inflation expectations and less volatile economic conditions.
"I anticipate that the yield curve is likely to be flatter, on average, than at comparable points in past business cycles.
This is not to say that the yield curve is going to be inverted all the time, but, on average, I believe the curve will be flatter," he said.
The yield curve has been inverted, meaning that yields on longer-term Treasuries were lower than those at the short end, for the past seven months.
The curve normalized after the most recent Fed policy decision on Wednesday, when it left benchmark short-term U.S. interest rates unchanged but dropped a reference to the possibility of further rate hikes.
Some cite the inversion as a signal of economic downturn, but Plosser played down that notion.
"I think the predictive value has declined," he said, when asked about the yield curve predicting economic trends.
Plosser cited two premises for a flatter yield curve: firstly, inflation and inflation expectations are likely to be lower and more stable, and secondly, inflation and the real economy are likely to be less volatile. That would keep both the risk premium and inflation premium -- factors that help determine the level of bond yields -- stay low.
But Plosser warned that a decline in economic volatility would not necessarily be permanent, noting gyrations in financial markets in the past several weeks, and that could possibly raise the risk premium.
Even if the real economy showed more signs of volatility, the Fed would aim to keep inflation down.
"I would note that even if volatility in the real economy returns to a higher level, the Federal Reserve is not likely to let the volatility in inflation rise, so that source of risk, I believe, will stay lower," he said.
On the impact of a flatter yield curve on banks, Plosser said that it would put pressure on interest income but that banks would be able to adjust.
"Banks have become progressively more adept at managing the interest rate risk inherent in this strategy and at insulating their net interest margins from unexpected changes in market rates," he said. "Consequently, the relationship between banks' net interest income and the slope of the yield curve has weakened over time."