12/3/2018 Fed’s Kashkari Still Believes Rate Increases Are a Bad Idea - WSJ

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U.S. ECONOMY Fed’s Kashkari Still Believes Rate Increases Are a Bad Idea President of Bank of Minneapolis says strong, sustained job gains indicate full employment not yet reached

Neel Kashkari, president of the of Minneapolis, speaking during a presentation in March 2017. PHOTO: ANDREW HARRER

By Michael S. Derby Dec. 3, 2018 530 a.m. ET

Federal Reserve Bank of Minneapolis President again made the case to hold off on interest-rate increases, warning that the U.S. could inadvertently push the economy into recession if it continues boosting borrowing costs.

“I’m still there. Nothing has changed,” Mr. Kashkari said of his opposition to rate increases. “Let’s just step back and see what the economy presents us” before acting again, he said Friday in a Journal interview.

Mr. Kashkari has been one of the Fed’s strongest critics of its campaign to push short-term rates higher. The central bank has been raising the cost of short-term borrowing since the end of 2015, when its target rate was close to zero. This year, it has acted three times, with its overnight target rate range now between 2% and 2.25%.

The Fed is expected to increase that range again in December and follow through with more raises next year. Fed officials are raising rates because many expect that a low jobless rate, now at 3.7%, will generate higher wages and in turn higher inflation over time.

Inflation has returned to around the Fed’s 2% target this year. The Fed believes price pressures may slightly overshoot that level in the future, so they would like higher borrowing costs to temper the path of price gains. https://www.wsj.com/articles/feds-kashkari-still-believes-rate-increases-are-a-bad-idea-1543833000 1/2 12/3/2018 Fed’s Kashkari Still Believes Rate Increases Are a Bad Idea - WSJ Some recent softness in inflation data, as well as concerns about slowing global growth in a climate of unsettled markets, has caused some to question the need for higher rates. In an interview last month, Philadelphia Fed leader Patrick Harker said, “At this point, I’m not convinced a December rate move is the right move,” given that there is no sign inflation is about to flare up.

Last week, financial markets reacted strongly to comments by Fed Chairman Jerome Powell that indicated the central bank was closer to reaching a neutral policy stance than was once the case. That suggested for some the end of rate rises was closer than they thought.

The chairman’s comments came as President Trump has been criticizing the Fed for its rate increases.

“I don’t think the political noise is having any effect on policy makers’ thought processes,” Mr. Kashkari said Friday. Central bankers are “totally focused on data and analysis, so I don’t think there’s any connection between politics and the chairman’s remarks.”

Mr. Kashkari, who isn’t currently a voting member of the interest-rate-setting Federal Open Market Committee, said, “We have plenty of time to raise rates if inflation or inflation expectations pick up.” He said it would be better for the Fed to step back and show that its inflation target is truly symmetric, meaning it would be all right for inflation to surpass 2% for a while just as it undershot that target for years.

“If inflation climbed to 2.1, 2.2 [percent], I don’t think that would be reason for us to slam on the brakes” with rate rises, Mr. Kashkari said.

Mr. Kashkari said the one piece of data that suggests the job market is at or near full employment, and thus in position to help generate higher inflation, is the unemployment rate. But the strength of hiring in an economy without much inflation indicates more Americans can join the labor force without creating an inflation problem.

“If the economy is creating 200,000 jobs a month, month after month after month, we cannot be at maximum employment,” he said.

Boosting rates further could be dangerous, Mr. Kashkari said. “The risk of some shock tipping us over into recession is higher than it was a year ago,” he said.

“We have housing slowing down; we have autos slowing down. There continue to be economic risks around the world, so I think there are a lot of things that could be the trigger” for a downturn, Mr. Kashkari said.

“I’m not forecasting a recession, certainly, but I’m not ruling it out. The one thing we can control that affects recession risks is the path of policy,” he said. “If we were to overdo on interest rates, I do think that could cause a recession, and I know none of us want that to happen.”

Write to Michael S. Derby at [email protected]

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