Mpls. Fed's Kashkari explains why he hasn't turned into a hawk on rates

Neel Kashkari, chief of the Federal Reserve Bank of Minneapolis, said Friday he supported the central bank's dovish interest-rate statement this week but voted against it because he thought policymakers still worry too much that inflation could get out of hand.

Since joining the Minneapolis bank in 2016 and getting a vote on the rate-setting Fed Open Market Committee (FOMC) in 2017 and this year, Kashkari has repeatedly voted to keep interest rates low — the stance of a dove in Fed jargon, in contrast to hawks who favor higher rates.

But this week, in the midst of the worst economic downturn since the Depression of the 1930s, the rate-setting committee adopted its most dovish statement yet by pledging to keep interest rates near zero until 2023. Still, the dovish Kashkari voted against that decision.

As he has done previously, Kashkari published an online essay outlining his thinking immediately after an embargo on discussions by committee members ended Friday morning.

"I strongly support" the committee's new policy, Kashkari began the essay. Then he explained why he pushed the committee to take a stance on inflation that is slightly more extreme than it finally adopted.

The central bank is mandated by Congress to balance the effects that interest rates have on employment and inflation.

In theory, low rates tend to support more hiring but can result in faster inflation, while high rates tend to suppress employment and suppress inflation.

Kashkari has repeatedly pointed out that during the long period of economic growth from 2009 to 2020, inflation consistently remained below the expectations and forecasts of many economists and, in particular, the Fed's policymakers. Inflation only very late in the expansion reached the 2% threshold that the FOMC set as its target.

But the Fed raised interest rates from the ultralow levels of 2008 and 2009 in part because low unemployment numbers led policymakers to think that inflation was near. In Friday's essay, Kashkari repeated his long-held view that policymakers were misreading the jobs scene.

While business owners complained of worker shortages, wages weren't rising, which led Kashkari to conclude that businesses didn't want to play by normal supply and demand rules.

"The fact that wages weren't climbing more quickly helped me to see through their complaints and realize that there was likely still slack in the labor market," he wrote.

As a result, policymakers thought the country was near full employment only to be surprised when the job market kept growing without causing high inflation.

Last year, Kashkari proposed that the committee publicly state that it would maintain a target range of interest rates "until core inflation has reached 2% on a sustained basis."

In this week's policy statement, the Fed committee said it would keep interest rates steady "until labor market conditions have reached levels consistent with the committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time."

Kashkari wrote in his essay that bringing in the employment situation muddies policymakers' job. He said the simpler construction in his proposal "guards against the risk" of thinking employment has peaked when it hasn't.

"We would only lift off once we had demonstrated that we really were at maximum employment, because core inflation would have had to actually hit or exceed 2% on a sustained basis in order to lift off," Kashkari wrote.

Evan Ramstad • 612-673-4241