Kashkari: U.S. economy, Fed are not ready for higher rates

Minneapolis Fed President Neel Kashkari voted against raising interest rates this week because the economy isn't ready for it, he said Friday, adding the central bank should first say how it's going to unwind $4.5 trillion on its books.

"Once we put that plan in place, and we see the market reaction to it, we can return to using the federal funds rate to remove monetary accommodation when the data call for it," Kashkari wrote in an essay published on the bank's website.

Kashkari was the only one of the 10 members of the Fed's policymaking Open Market Committee to vote on Wednesday not to raise the key rate, the federal funds rate, a quarter point.

His latest essay was an updated version of one he published on Feb. 7 in which he explained his decision not to raise interest rates at the committee's previous meeting on Jan. 31 and Feb. 1.

In that first essay, he concentrated on the two factors in the Fed's so-called dual mandate of keeping inflation in check and steering the country to full employment. Inflation, he noted, was below the bank's target range and the country's employers continued to add jobs, suggesting the employment target had not been met.

On Friday, he expanded on concerns he has about financial stability, both in the stock market and banking system. And he added a new section about the Fed's tools for dealing with the economy, zeroing in on the central bank's bond-buying program from October 2008 to October 2014. That effort to boost the economy saddled the Fed with more than $4 trillion in bonds and securities, a massive expansion of its balance sheet.

"I do not believe adjusting the balance sheet should be a regular policy tool," Kashkari wrote. "Instead, I believe we should begin the normalization process soon."

"I think it is imperative that we give the markets time to understand the details of the plan before it is implemented," Kashkari wrote.

It's unlikely to provoke much of a market reaction, he said. But he added: "We don't know that for certain."

The announcement alone may lead to "somewhat tighter monetary conditions," he wrote, the effect that the central bank tries to create by raising interest rates.

Fed Chairwoman Janet Yellen has said she would prefer to raise interest rates to a more normal level, then form a plan to unwind the debt holdings. She told a Senate committee last month that the process should be gradual and natural.

Kashkari, a former Treasury official and banker who became head of the Minneapolis Fed at the start of last year, has a vote on the FOMC throughout 2017 as part of a rotation among the chiefs of the 12 regional Fed banks.

On Friday, Kashkari wrote that he was still worried about the risks posed by the largest banks. "Monetary policy most certainly cannot address the too-big-to-fail risk," he wrote.