Federal Reserve Bank of Minneapolis President Neel Kashkari thinks it would be wise for the Federal Open Market Committee to take a breather from rate hikes.
With a 2% “symmetric” inflation target, the Fed has “the flexibility to see how the economy evolves before determining if further rate increases are necessary,” Kashkari wrote in an op-ed in the Wall Street Journal. With inflation at 2% following eight hikes in the federal funds rate target since late 2015, he said, “The FOMC should seize this opportunity for a pause.”
A fed funds rate of 2% to 2.25%, means monetary policy is “close to neutral, neither stimulating nor restricting the economy. Prematurely tapping the brakes could restrain wage growth and keep many Americans from participating in the economic recovery,” he wrote.
Since the 2% inflation target was “undershot” for at least six years before rising to that level in March, Kashkari, who doesn’t have an FOMC vote this year, wrote, “If inflation were to climb modestly above the target in the short run, there would be little need for the Fed to respond. If the 2% goal is truly symmetric, the Fed should be as tolerant of core inflation of 2.4% over six years as it has been with its downside misses over the last six.”
By pausing, the FOMC would be able to decide how much slack is left in the labor market. “For the past few years, policy makers have repeatedly thought the U.S. was at full employment, only to be surprised as Americans continued to enter the labor force in large numbers,” he said, noting the 3.7% unemployment rate is below the FOMC’s estimate that a 4.5% level means full employment.
A pause would also give time to evaluate the effects of the 2017 tax cut.
“If consumers and investors believe the economy is overheating and that additional debt from the tax cut will lead to greater price increases in the future, that should show up in inflation expectations,” Kashkari noted. “Yet expectations for inflation five to 10 years from now show little sign of increasing.”
He concluded, “until inflation or inflation expectations get meaningfully higher, the Fed should allow the economy to continue to strengthen, so as to allow as many Americans as possible to participate in the recovery.”
