Fed's Kashkari Says New Forward Guidance Could Have Been Stronger -- Update
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
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
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
"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.
"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 email@example.com
(END) Dow Jones Newswires
September 18, 2020 15:38 ET (19:38 GMT)
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