Kashkari: why I dissented to the Fed rate rise

Neel Kashkari, head of the Minneapolis Federal Reserve, chose to fly in the opposite direction of his colleagues on the central bank’s policy-setting board, dissenting to the rate rise early this week. On Friday, he issued an essay on why he made the decision.

Here are the highlights.

Inflation

Mr Kashkari acknowledged that the US economy has been generating higher levels of inflation recently, with the personal consumption expenditures price index ticking up to 1.7 per cent. Most policymakers have interpreted this to suggest that the Fed is not far from reaching its price stability made, but he sees it differently.

Importantly, we have said that 2 per cent is a target, not a ceiling, so if we are under or over 2 percent, it should be equally concerning.

…

Twelve-month core inflation is at 1.7 per cent, and while it seems to be moving up somewhat, it is doing so slowly, if at all. It is still below target, and, importantly, even if it met or exceeded our target, 2.3 per cent should not be any more concerning than the current reading of 1.7 per cent, because our target is symmetric.

Mr Kashkari also noted that other advanced economies are experiencing low levels of inflation, making it unlikely that US price growth will begin to increase too rapidly above the Fed’s target.

Most major advanced economies have been suffering from low inflation since the global financial crisis. It seems unlikely that the United States will experience a surge of inflation while the rest of the developed world suffers from low inflation. It is true that headline inflation rates have climbed around the world since the last FOMC meeting.

Labour market

Mr Kashkari said that he has been “wrestling” with the question of whether the jobs market has fully recovered from the financial crisis. The jobless rate, he notes, has fallen to 4.7 per cent from a peak of 10 per cent — near the level that many economists see as normal in a properly functioning economy. But the broader underemployment rate that includes both unemployed individuals and those working part-time because they cannot find full-time work, called the U-6 rate, has remained elevated.

The U-6 measure peaked at 17.1 percent in 2010 and has fallen to 9.2 percent today, which is still almost 1 percentage point above its pre-crisis level. The U-6 measure suggests that there may still be additional workers who might re-enter the labor force if the job market remains healthy.

Fiscal policy

There has been great debate among Wall Street economists and policymakers over the fiscal plans on the Trump administration. For instance, Donald Trump’s plans for business tax cuts and infrastructure spending could boost growth and inflation. But, as Mr Kashkari points out, they are not a done deal — something that has been underscored by the battle on Capitol Hill over the healthcare reform.

Janet Yellen said that some Fed officials had included expectations of fiscal policy in their forecasts, but that the March rate rise was not a response to any changes in fiscal policy.

Mr Kashkari notes:

I mentioned earlier that financial markets (both the stock and bond markets) seem to be pricing in some form of fiscal stimulus, perhaps tax cuts and/or increased spending, and perhaps a reduction in regulations from the new Administration and the new Congress. Those developments could be important to overall economic growth and, by extension, to the future path of monetary policy. But we have little information about what those new policies will actually be, what their magnitude will be and when they would take effect. Markets are guessing.

Financial markets are good at some things, but, in my view, notoriously bad at forecasting political outcomes. They didn’t forecast Brexit. They didn’t forecast the results of the U.S. presidential election. I don’t have much confidence in their ability to forecast fiscal policy given how little we know today. So I am not yet incorporating the markets’ guesses about fiscal policy changes into my outlook for the economy.