By Michael S. Derby 

New Federal Reserve guidance over the future path of interest rates fell short of what was needed, Minneapolis Fed leader Neel Kashkari said Friday.

"I strongly support" the new guidance, Mr. Kashkari said explaining his vote. But he also said, "while I believe the statement is a positive step forward...I would have preferred the Committee make a stronger commitment to not raising rates until we were certain to have achieved our dual mandate objectives."

The central banker was one of two regional bank presidents who voted against the outcome of the rate-setting Federal Open Market Committee on Wednesday. Then, officials held their short-term rate target steady and said that they would keep their short-term target rate very low until the job market had reached its maximum sustainable level, and inflation had risen to 2% and was on a path to moderately overshoot that goal.

The FOMC statement said Mr. Kashkari instead would have preferred for the Fed to pledge to hold off on raising rates until it had achieved core inflation levels of 2% for a sustained period.

In his defense of his dissent, Mr. Kashkari said the Fed has long struggled to understand the point at which labor markets are starting to overheat, and a misreading of that level had caused the central bank to implement tighter monetary policy that was justified in recent years, as it sought to ward off inflation threats that didn't exist.

Mr. Kashkari said the problem with the Fed's new guidance is that it still holds on to the importance of a basically unknowable variable, that maximum sustainable job level.

When it comes to reading the job market's inflation potential, "those are difficult judgments to make in real time," he said. "By eliminating both the direct reference to our assessment of maximum employment and any forecast of inflation climbing," Mr. Kashkari said his idea "guards against the risk of underestimating slack in the labor market."

Mr. Kashkari said that for him, the amount of sustained 2% core inflation would likely last roughly a year. He added that if inflation were to heat up unexpectedly, the Fed can easily deal with that.

In a separate speech later Friday, Mr. Kashkari turned his attention to the banking system and his continuing concern that financial institutions aren't prepared to face the next market crisis. He reiterated that he believes regulations are the only way banks will do what is necessary to shore up their positions to withstand major losses.

"Large banks will never address these risks on their own," Mr. Kashkari said. "There are some risks in society like this -- we call them externalities -- which the private sector simply cannot address on its own, and that is why strong government regulation is necessary to address those risks," he said.

Mr. Kashkari also said that when the government stepped in to help the economy weather the coronavirus crisis earlier this year, a lot of that effort went toward helping a financial system that continues to practice strategies that make it vulnerable when a shock arrives.

"I applaud Congress's bold actions to support people affected by the Covid-19 crisis, but we need to be clear that families weren't the only beneficiaries. This was also a banking bailout," Mr. Kashkari said.

"Fundamentally, I wonder why we allow firms, financial or otherwise, to fund themselves overnight? What societal value is there in such a system that proves so fragile when risks emerge?" the central banker asked.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

September 18, 2020 15:38 ET (19:38 GMT)