Neel Kashkari explains why Fed should keep interest rates low

Why Fed should keep interest rates low? Minneapolis Federal Reserve President Neel Kashkari has explained this perspective in his online post. 

8 February, AtoZForex Minneapolis Federal Reserve President Neel Kashkari has indicated a patient stance in relation to the interest rates pace. He believes that there is no rush to hike the borrowing costs across the US.

Why Fed should keep interest rates low?

Neel Kashkari has stated that the US economy has not yet hit the top in terms of inflation and employment. He believes that the point that is requiring to be more aggressive in relation to the monetary policy, has not been reached yet.

As an outcome, Mr. Kashkari joined Fed policymakers last week in their initiative to keep the interest rates across the US stable. Considering Mr.Kashkari’s stance, it would take time for his to change his mind over the interest rate issue. He has written in the online message:

“From a risk management perspective, we have stronger tools to deal with high inflation than low inflation. Looking at all this together led me to vote to keep rates steady.”

Normally, Fed officials do not share their thoughts online in blogs. They communicate their intentions to the public via the policy statements from the FOMC meetings. Moreover, individual speeches are used by Fed rate-setters to inform the public about the upcoming changes.

Mr. Kashkari has stated he chose such way because the FOMC statements “can be somewhat difficult for the general public to decipher.” The reason for Kashkari’s dovishness is that there is more room for improvement in the labor market than the current unemployment rate suggests. Additionally, the inflation measures and the expectations both remain at low levels. In his post, he has stated:

“The bottom line is the job market has improved substantially, and we are approaching maximum employment. But we aren’t sure if we have yet reached it. We may not have.”

A view from inside: Fed forecasting

Nevertheless, his statement emerges at an interesting time for the Fed. In December 2016, Fed policymakers have hiked the interest rates by 0.25 percent to 0.75 percent. In addition, they have forecasted as much as 3 rate hikes throughout 2017. However, the markets are seeing only two rate hikes in the current year. Mr. Kashkari has mentioned Fed’s issue with forecasting the future. Specifically, he has mentioned:

“Our near-term policy predictions have been wrong a lot over the past few years — better to not make such predictions in the first place.”

Yet, while looking at the conditions, Fed policy is not as slack as it may appear, according to Mr. Kashkari. Taking the current interest rates into the consideration, and deducting the 1.7 percent inflation rate gives us the real funds rate at the range of -1.2 percent and -0.95 percent. However, he believes that the natural interest rate is nearly at zero. This implies that the current real fund’s rate is only around 1 percent to the “accommodative” side. He further stated:

“Monetary policy has been at least this accommodative for several years, including the effects of the Federal Reserve’s expanded balance sheet, without triggering a rapid tightening of the labor market or a sudden increase in inflation. This suggests monetary policy has only been moderately accommodative over this period. This level of accommodation seems appropriate today given where we are relative to our dual mandate.”

Furthermore, Mr. Kashkari has expressed his concerns about the financial stability of the US. Yet, he thinks that the monetary policy definitely cannot address the ” too-big-to-fail risk.” Overall, Neel Kashkari signaled he believes that the US economy will be fine even if the Fed lets inflation “run a little hot.”

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