Kashkari supports the idea that the Fed can take time to cut interest rates

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Neel Kashkari, president and chief executive officer of the Federal Reserve Bank of Minneapolis, in an interview in New York, USA, on Tuesday, November 7, 2023.

Victor J. Blue | Bloomberg | Getty Images

Interest rates running at their highest levels in about 23 years are not hurting the economy and could buy policymakers more time before deciding whether to cut, Minneapolis Federal Reserve President Neel Kashkari said Monday.

In an essay published on the central bank’s website, Kashkari said that economic developments have shown that the Fed’s policy is not as restrictive on growth as it appears on the surface.

That means the “neutral” rate that is run longer, or the rate that is not restrictive or encouraging, is higher than it was before the Covid pandemic.

In fact, what would have looked like historically tight monetary policy over the past 15 years or so no longer looks that way, meaning that nominal rates could remain higher for longer without to harm the economy.

“This constellation of data suggests to me that the current stance of monetary policy … may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic,” he wrote Kashkari.

The implications are important as the Fed considers when to start, how much it should cut and how quickly it should do so to get back to a neutral position. Markets have been betting on an aggressive move lower, but recent statements from central bank officials suggest there is little need to rush.

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“It is possible that, at least in the post-pandemic recovery period, the policy stance representing neutral has increased,” wrote Kashkari, a non-voting member of the rate-setting Federal Open Market Committee. -year. “The effect of this, I believe, is that it gives the FOMC time to assess the upcoming economic data before they begin reducing the federal funds rate, with less risk that too tight a policy is going to stop the recovery of the economy.”

Kashkari’s comments mirror those of Fed Chairman Jerome Powell a few days ago.

During his press conference after the meeting last Wednesday and in an interview broadcast Sunday night by CBS’ “60 Minutes,” Powell said that a cut in March is unlikely and agreed with pre- The December FOMC estimate for cuts of three quarters of a percent this year.

In particular to Kashkari’s argument, Powell noted that the negative effects he feared did not come from the series of rate hikes implemented by the Fed. The Fed raised its benchmark overnight rate 11 times by 5.25 percentage points in a tightening cycle that ran from March 2022 to July 2023.

“” Of course it didn’t happen. The economy has been growing strongly. Job creation has been high,” he said on “60 Minutes.” “So really the kind of pain that was bothering me and so many other people, we didn’t have that.”

Despite widespread expectations for a recession, the US economy as measured by gross domestic product grew at an annual pace of 2.5% in 2023. Payroll growth has been strong while measures by the inflation has decreased.

Kashkari pointed to a combination of such data to show that the Fed’s hikes have not hindered growth, leading to his conclusion that the neutral rate is likely to be higher than the 0.5% or Fed officials generally considering

There is no official “neutral rate” and officials often emphasize that it can only be measured but never seen. Some policymakers like to use the funds rate minus inflation as neutral; Kashkari prefers the 10-year TIPS yieldnow around 1.82%. He is aware that it has increased since last year, but only to a small extent.

At the same time, business investment and big-ticket purchases have increased while housing numbers have at least changed.

“This data makes me question how much downward pressure monetary policy is currently putting on demand,” said Kashkari.

He noted that the data is “unequivocally positive” and monitors things like loans and credit cards for evidence of economic stress.

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