The current monetary policy is appropriate for now, Federal Reserve Bank of Minneapolis President and CEO Neel Kashkari said Monday.
"[G]iven the lack of notable price and wage pressures and the possibility of drawing more people back into the labor market, I believe the current accommodative policy stance is appropriate," Kashkari told the Economic Club of Minnesota according to prepared text released by the Fed. "The usual cost of stimulating the labor market through accommodative monetary policy would be an undesired increase in inflation. But in the current circumstances, with inflation running below the Fed's 2 percent target, an increase in inflation is actually desirable. Furthermore, while monetary policy's influence on the labor market may not be enormous at this point, we can have at least some impact. If we can continue bringing displaced workers back into the labor force, we should."
While noting this stance could result in his being classified as a dove, he remarked, "But a year or two from now, if different economic conditions lead me to call for less accommodative policy, they might conclude that I have reversed myself and become a hawk. The truth is neither. The financial crisis taught me the limits of dogma. I learned humility and pragmatism the hard way."
The economy has room for improvement. While the unemployment rate has dropped to 5.0%, other measures suggest the economy is not yet at full employment levels. "Involuntary part-time employment remains elevated from its prerecession levels, and compensation growth remains subdued, though recent data and anecdotes suggest that it may finally be starting to pick up," he said.
Inflation remains problematic, with the inflation rate, as measured by personal consumption expenditures, under the Fed's target of 2% for four years. "Moreover, measures of inflation expectations provide little evidence that inflation is likely to increase above the 2 percent target in the near future."
Kashkari said market participants concentrate too much on the Fed instead of focusing "on solutions to longer-term issues."
The slow growth in output, combined with rapid growth in employment, is a "notable" development, he said, which suggested the average worker's productivity is growing slowly or falling. While noting it could be a statistical fluke, Kashkari said, it has persisted "long enough that it is likely to at least partly reflect real economic developments."
"Moreover, it may be a troubling sign for the future of our economy. We don't know. On the one hand, it may just be a cyclical effect of the workers rejoining the labor force now being much less productive than those already working. On the other hand, the weaker productivity may reflect long-term underlying trends in the use of capital or the pace of technological progress that could herald slower growth for many years to come, which would be very costly for society," he said.
