Kashkari Says Pause on Rate Hikes Is Way to Go

The Bond Buyer - - Market News - — Gary E. Siegel

Fed­eral Re­serve Bank of Min­neapo­lis Pres­i­dent Neel Kashkari thinks it would be wise for the Fed­eral Open Mar­ket Com­mit­tee to take a breather from rate hikes.

With a 2% “sym­met­ric” in­fla­tion tar­get, the Fed has “the flex­i­bil­ity to see how the econ­omy evolves be­fore de­ter­min­ing if fur­ther rate in­creases are nec­es­sary,” Kashkari wrote in an op-ed in the Wall Street Jour­nal. With in­fla­tion at 2% fol­low­ing eight hikes in the fed­eral funds rate tar­get since late 2015, he said, “The FOMC should seize this op­por­tu­nity for a pause.”

A fed funds rate of 2% to 2.25%, means mone­tary pol­icy is “close to neu­tral, nei­ther stim­u­lat­ing nor re­strict­ing the econ­omy. Pre­ma­turely tap­ping the brakes could re­strain wage growth and keep many Amer­i­cans from par­tic­i­pat­ing in the eco­nomic re­cov­ery,” he wrote.

Since the 2% in­fla­tion tar­get was “un­der­shot” for at least six years be­fore ris­ing to that level in March, Kashkari, who doesn’t have an FOMC vote this year, wrote, “If in­fla­tion were to climb mod­estly above the tar­get in the short run, there would be lit­tle need for the Fed to re­spond. If the 2% goal is truly sym­met­ric, the Fed should be as tol­er­ant of core in­fla­tion of 2.4% over six years as it has been with its down­side misses over the last six.”

By paus­ing, the FOMC would be able to de­cide how much slack is left in the la­bor mar­ket. “For the past few years, pol­icy makers have re­peat­edly thought the U.S. was at full em­ploy­ment, only to be sur­prised as Amer­i­cans con­tin­ued to en­ter the la­bor force in large num­bers,” he said, not­ing the 3.7% un­em­ploy­ment rate is be­low the FOMC’s es­ti­mate that a 4.5% level means full em­ploy­ment.

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